The Tax Cuts and Jobs Act (TCJA), which was signed into law in December 2017, contained numerous changes to cost recovery methods for capitalized assets. These changes provide manufacturers with an unprecedented ability to accelerate depreciation and lower income tax liabilities.
One of the most widely discussed provisions of the TJCA was the extension and modification of the additional first-year depreciation deduction, commonly referred to as “bonus depreciation.” The new law allows bonus depreciation on certain business assets that are acquired and placed into service after September 27, 2017, but before January 1, 2027. While the old law had allowed for a bonus depreciation percentage of 50%, the new law allows for a bonus depreciation percentage of 100% until December 31, 2022. After 2022, the bonus depreciation percentage begins to phase down (80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026). Additionally, prior law required that the original use of the property began with the taxpayer in order to qualify for bonus depreciation; in other words, used property was not eligible for bonus depreciation. The TJCA removes this restriction – both new and used property are eligible for bonus depreciation after the effective date.
The TJCA didn’t stop at enhancing bonus depreciation, however. Under the new law, Sec. 179 has been modified to increase the maximum deduction to $1 million (up from $500,000 under prior law). The deduction limit is reduced dollar for dollar to the extent the total cost of Sec. 179 property exceeds $2.5 million (increased from $2 million under prior law). Both of these limits will be adjusted annually for inflation.
Changes in bonus depreciation may cause Sec. 179 to go largely unutilized in the future since one of its primary advantages under prior law has been removed (the ability to immediately expense used property). However, a modification to Sec. 179 ensures that it still has an important place in the tax planning process. After 2017, a taxpayer may elect to include certain building components (roofs, HVAC property, fire protection and alarm systems and security systems) as Sec. 179 property. As such, these components are now eligible to be immediately expensed, provided the improvements are made to nonresidential real property and are placed into service after the date the realty was first placed into service.
While the above changes may provide the most benefit to manufacturers, there were several other changes to cost recovery methods that may affect manufacturers. Additionally, there are numerous other provisions of this sweeping tax reform that have changed the landscape of taxation.
If you have questions or would like to discuss how the TCJA impacts your company, please contact your local Blue & Co. advisor.