The good news continues as we have reached the blog on bonus depreciation in our third and final part of this series. As we have talked about before in our previous posts, the Internal Revenue Service and Congress have significantly increased the opportunity for taxpayers to currently deduct the costs of property purchased for use in business, rather than having to depreciate those costs over many years.
As previously mentioned, there are three provisions that allow taxpayers to accelerate deductions for the costs of capital assets and other property and avoid depreciation, which include the following:
- bonus depreciation
- expanded Sec. 179 expensing
- the de minimis exception to the tangible property, or “repair,” regulations
It is important to note that all three provisions can be used in the same year, although not on the same costs. It is our goal for taxpayers and their advisers to understand these new rules in order to take full advantage of them.
The bonus depreciation provision allows taxpayers to take an additional depreciation deduction in the first year qualified property is placed in service. It is taken after any Sec. 179 deduction and before regular depreciation. Currently, bonus depreciation allows taxpayers to deduct up to 50% of the cost of eligible property in the year it is placed in service; however, after year 2017 this rate will be reduced.
The primary criteria to qualify for bonus depreciation is that the property be new, tangible property (this excludes land or buildings) that has a MACRS recovery period of no more than 20 years. Computer software does qualify.
The PATH Act has introduced a phasedown in the amount of the bonus depreciation deduction. For property placed in service between January 1, 2012, and December 31, 2017 the deduction amount is 50%.
For qualified property placed in service in 2018 the amount is 40%, and the rate will further drop to 30% for qualified property placed in service in 2019. After that time, bonus depreciation is scheduled to expire.
ELECTING OUT OF BONUS DEPRECIATION
Taxpayers can elect out of bonus depreciation for any class of property for any tax year. The election must be made by the due date (including extensions) of the federal tax return for the tax year the property is placed in service by attaching a Statement to the return.
If a taxpayer fails to elect out of bonus depreciation properly, the basis in the property will be considered to have been reduced by the amount of the bonus depreciation, even if the taxpayer did not claim this deduction for the year the property was placed in service.
We hope this series of blogs on the new provisions from the IRS and Congress has been helpful to you. If it has raised some questions related to your particular circumstances, please feel free to contact us at 615-385-0686 to explore how these provisions might help you to currently deduct the costs of property purchased for use in business, rather than having to depreciate those costs over many years.