100% Bonus Depreciation and other Depreciation Changes Under the Tax Act

The Tax Cuts and Jobs Act made significant changes to depreciation on assets placed in service during the year.  The changes allow business owners greater accelerated write-offs for most assets purchased during 2018; some of these changes went into effect for assets placed in service after 9/27/2017.

100% Bonus Depreciation on Qualifying Assets

  • Available for assets placed in service after 9/27/17 and before 1/1/23
  • Changes bonus depreciation to qualified new and used Only new assets qualified under prior law.

Increased Depreciation for Luxury Vehicles

  • Available for purchases after 12/31/17
  • $10,000 for year 1; $16,000 for year 2; $9,600 for year 3; and $5,760 thereafter;

Changes to Farm Depreciation

  • Shortened depreciation lives for new farm property from 7 to 5 years
  • Changed farm depreciation for 3,5,7, and 10 year class-life assets from 150% declining balance to 200% declining balance
  • Both changes effective for purchases made after 12/31/17

Changes to Code Section 179

  • Deduction increased to $1,000,000 for property placed in service after 12/31/17
  • Phase-out on total equipment purchases begins at $2,500,000 and is adjusted annually for depreciation
  • Extended to roofs on commercial property, personal property in residential rentals, HVAC units, security systems, fire protection, and alarm systems

Bonus versus 179-Advantages and Disadvantages

  • There is no cap on the total dollar amount of assets eligible for bonus depreciation; section 179 phases out once a taxpayer purchases $2,500,000 in equipment during the year.
  • Bonus depreciation can create an overall tax loss on business income that can be used to offset other income. Section 179 is limited to overall net income from combined business income before the Section 179 deduction.
  • Section 179 limited to more than 50 percent business-use assets. Bonus depreciation available regardless of business use percentage.
  • Section 179 offers more flexibility for mixing and matching regular depreciation, bonus, and Section 179. For instance a taxpayer can claim a partial Section 179 deduction on an asset, and regular depreciation on the remaining portion of an asset, or claim Section 179 on one 5-year class life asset, but regular or bonus depreciation on a separate 5-year asset.  Bonus depreciation is all or nothing.  If you elect out of bonus depreciation on a 5-year class life asset, you have to elect out on all 5-year assets placed in service by the taxpayer in that same year.