New Law Allows 100% Bonus Depreciation

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Bonus depreciation is a tax incentive originally introduced in 2002 to stimulate the economy. It has been extended several times since in various formats. Bonus depreciation allows a business to take an immediate first-year deduction on part of the cost of many business assets rather than depreciating it over time. Since it is available only for assets with tax lives of 20 years or less, bonus depreciation does not cover real estate acquisitions. In recent years, it has allowed 50% of the cost of eligible assets to be written off immediately, with the other 50% deducted in subsequent years.

 

The 2017 Tax Cuts and Jobs Act contains important changes to the bonus depreciation rules. Nearly all of these changes are taxpayer-friendly, but none more so than the increase in the rate from 50% to 100% (full write-off). This new rate is effective for eligible capital assets acquired after September 27, 2017. The 100% rate will phase down at a rate of 20% per year after 2022, so (barring future tax law changes) bonus depreciation will end after 2025.

 

Another noteworthy change allows taxpayers to claim bonus depreciation for the first time on used assets. Previously, this was not permitted unless the taxpayer was the original user of the property. Bonus depreciation cannot be used if the used property is purchased from a related party.

 

Due a drafting error in the new law, interior improvements to nonresidential real property (such as business leasehold improvements) must now be depreciated over 39 rather than 15 years. Since this is longer than a 20-year life, these improvements are no longer eligible for bonus depreciation. Congress could enact a "technical correction" law to again allow a 15-year life and bonus depreciation on these assets. We will keep you informed of any developments.

 

Update

In our last tax alert we explained that the new law permits some section 529 plan funds to be used for elementary and secondary school education. We want to clarify that distributions may be used only for tuition expenses at those schools. Use of section 529 plan funds for related items such as supplies, fees, and computers is permitted only for college students.

 

The TCJA made sweeping changes to tax law, impacting virtually every taxpayer. We are focused on the immediate and long-term impact of the TCJA on your situation. Please call our office for guidance on all of the provisions that directly affect you.

 

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