Capitalizing on the New Bonus Depreciation Rules


The Tax Cuts and Jobs Act of 2017 was
the largest overhaul of the tax code in over three decades. One of the more
significant changes brought about by the reform was the increase of bonus
depreciation on assets used in business from 50% to 100%. This was
put into effect for qualified property acquired and placed into service after
September 27, 2017 and before January 1st, 2023. In order for property to qualify for the
100% bonus depreciation, it must have been acquired by the taxpayer after
September 27, 2017 and placed into service in their business between
September 28th, 2017 and December 31st, 2022. Generally, the property would have a
recovery period of 20 years or less under the modified accelerated cost
recovery system, or MACRS for short. Typical property falling under this
recovery period includes computer hardware, some computer software, and both
furniture and fixtures. Effectively, the 100% bonus depreciation allows the
taxpayer to expense the entire amount of the cost to acquire and place the asset
into service immediately, instead of expensing it ratably over the deemed life
of the asset. It’s important to note that, for the most part, property that’s
depreciated under the alternative depreciation system, or ABS, is ineligible
for this 100% bonus depreciation, with few exceptions as noted by the
final regulations. Qualified improvement property is
generally defined as any improvement that was made to the interior of a
non-residential real property and placed into service after the building was up
and running. Prior to the Tax Cuts and Jobs Act, the tax code categorized
certain similar improvements into three separate categories: qualified
leasehold improvement property, qualified retail improvement property,
and qualified restaurant improvement property. These improvements were
eligible for a 15-year recovery period and qualified for 50% bonus depreciation
as they had a recovery period of less than 20 years. With the
recharacterization of these three categories into one general category
entitled qualified improvement property, the 15-year recovery period reverted to
39 years, as a January 1st, 2018. Accordingly, qualified improvement
properties aren’t eligible for the new 100% bonus depreciation, as of this date. The
result is that property that was originally eligible for 50% bonus
depreciation is now ineligible for 100% bonus depreciation and, ultimately,
has a recovery period of 39 years. It was anticipated that a
correction would be made to characterize qualified improvement property as 15-year
property, however this hasn’t been corrected through the newly issued final
regulations and the newly drafted proposed regulations, though this matter
may still be corrected in the future. Although the bonus depreciation rules
may seem straightforward, understanding and applying the final regulations and
newly proposed regulations to your individual business situation can be
complex so it’s always a wise idea to consult who your tax adviser before
taking any action. I’m Chris Souza with Untracht Early.

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