Bonus Depreciation: How Tax Reform Temporarily Enhances the Business Tax Break
Recent tax reform has enhanced some tax breaks for businesses while reducing or eliminating others. For instance, the Tax Cuts and Jobs Act (TCJA) temporarily enhances bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you could benefit from the bonus depreciation enhancements when you file your 2017 tax return.
Pre-TCJA bonus depreciation
Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50 percent first-year bonus depreciation deduction. Used assets don’t qualify. Qualifying new assets include new computer systems, purchased software, vehicles, machinery, equipment and office furniture.
In addition, 50 percent bonus depreciation can be claimed for qualified improvement property (QIP). QIP is any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. However, qualified improvement costs do not include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.
TCJA expands bonus depreciation
For qualified assets that were acquired and placed in service after September 27, 2017, and before January 1, 2023, the first-year bonus depreciation increases from 50 percent to 100 percent. However, you can elect to continue to use the pre-TCJA bonus depreciation rules of 50 percent depreciation for your first tax year ending after September 27, 2017. Depending on your tax facts, this might make sense for your business.
Another enhancement to bonus depreciation is that it is now applicable to used assets. Historically, it was only allowed for new assets. Now, if you have acquired property that is used or a building that has some qualified assets in it, that used property is eligible for 100 percent bonus depreciation.
The new law also allows 100 percent bonus depreciation for qualified film, television and live theatrical productions placed in service after September 27, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
Beginning in 2023, bonus depreciation is scheduled to be reduced by 20 percent each year. So, property placed in service in 2023 would qualify for 80 percent depreciation, in 2024 would qualify for 60 percent depreciation, and so on until it would be fully eliminated in 2027.
For certain property with longer production periods, the reductions are delayed by one year. For example, 80 percent bonus depreciation would apply to long-production-period property placed in service in 2024.
To learn more about bonus depreciation or other changes under tax reform that will impact your business, please contact us.