First-year bonus depreciation has been around for a while now. However, the Tax Cuts and Jobs Act (TCJA) set forth more-generous, but temporary, rules for 2018 through 2026. Recent IRS guidance gives you additional flexibility to fine-tune the bonus depreciation break to suit your specific business and personal tax circumstances. Here’s what you need to know.
Old Rules, New Rules
Under current law, for qualified property acquired and placed in service between September 28, 2017, and December 31, 2022, the TCJA increases the first-year bonus depreciation percentage to 100%. The end date for certain property with longer production periods and certain aircraft is December 31, 2023.
In addition, 100% deduction is now allowed for both new and used qualified property. For used property to be eligible for bonus depreciation, it can’t have been used previously by the same taxpayer. In other words, it must be new to the taxpayer.
After 2023, bonus depreciation will still be available for both new and used qualified property, but the percentages will be reduced as follows:
- 80% for property placed in service in calendar-year 2023,
- 60% for property placed in service in calendar-year 2024,
- 40% for property placed in service in calendar-year 2025, and
- 20% for property placed in service in calendar-year 2026.
For property with longer production periods and certain aircraft, these percentage cutbacks are delayed by one year. For example, the 80% deduction rate will apply to such property that is placed in service in 2024.
Before the TCJA, the bonus depreciation rate was only 50%. And bonus depreciation was allowed only for new qualified property.
To be eligible for bonus depreciation under the current rules, property generally must meet one of these descriptions:
- Property with a depreciation period of 20 years or less,
- Most computer software,
- Qualified water utility property, or
- Qualified film, television or live theatrical production property.
The 100% first-year bonus depreciation break can have a significant impact on depreciation deductions for “heavy” passenger vehicles, including heavy SUVs, pickups and vans, used over 50% for business.
To illustrate, suppose you spend $60,000 on a new heavy SUV in 2019 and use it 100% in your unincorporated small business. Thanks to the 100% first-year bonus depreciation deal, you can deduct the entire $60,000 on your 2019 return.
This break is available only for vehicles that have a manufacturer’s Gross Vehicle Weight Rating (GVWR) above 6,000 pounds. Popular examples include the GMC Acadia, Ford Explorer, Jeep Grand Cherokee, Toyota 4Runner and many full-size pickups. A vehicle’s GVWR is found on the manufacturer’s label, typically located on the inside edge of the driver’s side door where the door hinges meet the frame. (Don’t expect dealer sales personnel to know which vehicles have GVWRs above 6,000 pounds. Check for yourself.)
Making or Revoking Bonus Depreciation Elections
For assets acquired after September 27, 2017, and placed in service during the tax year that includes September 28, 2017, taxpayers can elect to either:
- Entirely forgo bonus depreciation, or
- Claim 50% bonus depreciation (instead of 100%).
Taxpayers can also elect to entirely forgo bonus depreciation for later tax years, like your 2019 tax year. Making these elections takes the bonus depreciation write-off out of the affected tax year and increases “regular” depreciation deductions in later tax years. This makes sense if:
- Your business has an expiring net operating loss (NOL) that you want to use up in the affected tax year, or
- You expect your business income to be taxed at higher rates in later years (a reasonable assumption given the current political environment).
You can make these elections for one or more specific classes of property without affecting bonus depreciation deductions for other classes of property. “Classes of property” means property placed in service during the tax year with “regular” depreciation periods of:
- 3, 5, 7, 10, 15 and 20 years,
- Water utility property, and
- Depreciable computer software.
Taxpayers that failed to make these elections for the tax year that included September 28, 2017 (calendar-year 2017 returns in most cases), can make late elections for a limited time. Taxpayers can also revoke prior-year bonus depreciation elections for a limited time.
Update on Bonus Depreciation for QIP
When drafting the Tax Cuts and Jobs Act (TCJA), Congress originally intended to permanently install a 15-year depreciation period for qualified improvement property (QIP). That change would have made such property eligible for bonus depreciation in tax years after the TCJA took effect.
QIP refers to any improvement to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service. But, it doesn’t include any improvement for which the expenditure is attributable to:
- Enlargement of the building,
- Any elevator or escalator, or
- The internal structural framework of the building.
Unfortunately, due to a TCJA drafting glitch, QIP wasn’t added to the list of property with a 15-year depreciation period. Therefore, until this problem is fixed, QIP is still subject to a 39-year depreciation period (as under prior law). Therefore, it’s not eligible for bonus depreciation.
Since the TCJA passed in late 2017, several bills have included provisions that would have made technical corrections to this glitch. However, in the current political environment, the odds are low that Congress will pass any legislation that includes a technical correction to allow bonus depreciation for QIP.
Important: Recently issued final IRS regulations on bonus depreciation confirm that legislation will be required to fix the QIP glitch. The IRS can’t make the fix itself.
A tax professional can help you file the appropriate tax forms to take first-year bonus depreciation, to elect alternative bonus depreciation treatment, or to make or revoke bonus depreciation deductions in a subsequent tax year. Contact your expert for more information.