If you are planning to make some purchases for your business before the end of the year, it may benefit you on your tax return come April. This is due to the expansion of regular and bonus depreciation deductions for business property under the Tax Cuts and Jobs Act (TCJA), also known as tax reform.
The new tax laws, the impact of which you are likely to see for the first time on your 2018 tax return, effectively reduce the cost of acquiring capital assets through significant changes to the rules of section 179 of the IRS code. In addition, tax reform has expanded regular depreciation deductions for business property, generally defined as that used in income-producing activity.
Unlike in tax years past, if you make property purchases for your business now you will be able to write off the entire purchase price of qualifying equipment during this current tax year. This immediate expensing applies for future tax years as well.
In case you are planning to make some significant purchases, keep in mind that the changes to Section 179 under tax reform increases the maximum deduction from $500,000 to $1 million. The phase-out threshold was also increased from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after Dec. 31, 2017.
The majority of tangible goods purchased by businesses qualify for Section 179 deductions, however it’s still important to be clear that purchases must be for business use in order to deduct them. Examples of qualifying purchases include:
- Office equipment
- Computers and peripheral equipment (These items are no longer subject to the minimum 50 percent qualified business use rule.)
- Off-the-shelf software
- Office furniture
- Personal property used in business (Your deduction is based on the percentage of time you use personal property for business.)
- Vehicles used for business with a gross weight of 6,000 pounds or more.
- Improvements made to nonresidential real property after the date when the property was first placed in service as long as it is deemed “qualified improvement property” by the IRS
In regard to deductions for improvements to a building used to conduct business, the deductions apply only to expenses related to interior upgrades. Any improvements that enlarge a building, add an escalator or elevator to it, or change structural framework of the building are excluded as are roof work, HVAC upgrades, fire protection systems, alarm systems and security systems.
If you started your business in 2018 and have purchased depreciable assets for it, you may elect to use the new 100 percent bonus depreciation deduction. This applies to items such as machinery, equipment, computers, appliances and furniture. Under tax reform, expensing for certain film, television, and live theatrical productions. In addition, used qualified property may be allowed.
If you elect to use bonus first-year depreciation, it will apply to all qualified property that is in the same class of assets and placed in service in the same taxable year. There are also certain types of property which are not eligible for bonus depreciation including any property used in a trade or business that has floor-plan financing (i.e. financing secured by motor vehicle inventory that a business sells or leases to retail customers.).
If you have any questions about changes to section 179 of the IRS code or deductions for business expenses please contact our lower Manhattan firm and ask our NYC CPA.