Section 179 Amounts Increased by New Tax Law

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The Tax Cuts and Jobs Act (TCJA) modifies many depreciation-related provisions, generally to taxpayers' benefit. Changes to bonus depreciation were covered in a previous Tax Alert. TCJA also increased the dollar and investment limitations of section 179 and expanded the definition of its property.

 

Section 179 Expensing

Section 179 allows a business to deduct the full purchase price of qualifying assets in the year it is placed in service. Businesses may expense purchases such as machinery and equipment, office furniture and equipment, vehicles (if they weigh over 6,000 pounds), computers, and off-the-shelf computer software.

 

Starting in 2018, TCJA increases the maximum that may be expensed under section 179 from $510,000 to $1 million and raises the phaseout threshold amount (after which the expense is reduced) from $2.03 million to $2.5 million of new purchases. It is entirely eliminated at $3.5 million. The amounts are indexed for inflation after 2018. Unlike many TCJA provisions, section 179 increases are permanent.

 

In addition to the increased amounts, some previously nonqualified assets may now use section 179 expense. These include roofs, HVAC equipment, and fire and security systems in commercial buildings, and certain property used to furnish lodging.

 

Section 179 vs. Bonus Depreciation

TCJA narrows the difference between bonus depreciation and section 179. Both currently allow full deduction of new purchases and both allow "new-to-you" used property. However, differences remain: 

  • Section 179 is allowed only when there is taxable income. Section 179 amounts limited by this rule carry forward to the following year. Bonus depreciation may create or increase a loss.
  • The dollar amount of section 179 expense is limited and subject to a spending cap. Bonus depreciation is unlimited.
  • New York, New Jersey, and most other states disallow bonus depreciation, requiring unfavorable state adjustments. Some states limit section 179 (New Jersey caps it at $25,000), but others (like New York) allow the full federal deduction.
  • A drafting error in TCJA made business leasehold improvements ineligible for bonus depreciation, but taxpayers may elect section 179 expense on qualified improvements.
  • Large businesses that exceed the section 179 spending cap may only use bonus depreciation.
  • 100% bonus depreciation phases down after 2022. Section 179 will not change except for inflation adjustments.
  • When both benefits are used, section 179 is claimed prior to bonus depreciation.

Update

Acting IRS Commissioner David Kautter announced that guidance on the deduction for pass-through income will likely be provided earlier than previously announced. Speaking at an event on June 8, Kautter said proposed regulations could be issued in a "couple of weeks."

 

Call your LMC professional if you want to discuss how the new section 179 rules or other provisions of TCJA affect your situation.

 

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