The 2018 Tax Cuts and Job Act has three important differences regarding bonus depreciation:
The bonus depreciation will temporarily be 100%!
In order to take bonus depreciation, the personal property item does NOT have to be new. That’s a huge change.
The 100% bonus depreciation is retroactive to purchases after September 27, 2017.
And now, let’s add in some new rules from another Act, the PATH Act. Property that qualifies for bonus depreciation (“qualified property”) now includes four additional categories:
- MACRS (modified accelerated cost recovery system – i.e., depreciable) property with a recovery period of 20 years or less,
- Computer software,
- Water utility property, and
- Qualified improvement property (to non-residential real property)
This last one is pretty new and important for real estate investors. The improvements must have been made after the property is put in service. And there are 3 types of improvements that are exclude:
- Enlargement of the building,
- Elevator or escalator,
- Internal structural framework.
Think carefully about when and how you want to use this new provision, especially if it’s for your real estate. Some thoughts:
Should you buy personal property now (the tail end of 2017) to take advantage of Section 179 or bonus depreciation? Maybe. If you have a flow through entity for your business, you may pay less tax next year if you qualify for the 20% reduction. The deduction is more valuable in 2017.
If your taxable income is under $315,000 (married filing jointly), you likely qualify for that reduction. In that case, you may want to take the deduction in 2017.
If you have real estate investments that net you over $315,000 (married filing jointly), you’ll be limited to a reduction by the greater of 50% of your W-2 wages or 25% of your W-2 wages plus 2.5% of depreciable assets. Most businesses will probably use the 50% of W-2 wages as the upper limit for the qualifying amount. However, most real estate investors will use 25% of W-2 wages plus 2.5% of depreciable assets.
If you’re a real estate investor and depreciate a lot of your property in 2017, it will no longer count in the calculation. In order to qualify for the “2.5% of depreciable asset calculation”, the property must still be in its depreciable life.
In that case, it may be better to wait on the improvements until 2018.
This is just one area of the complications brought about by the new tax law. And worst of all, you have less than a week to decide what you’re going to do.