Bonus depreciation has long been a popular provision in the income tax code because it allows a significant portion of assets placed into service each year to be deducted through depreciation that same year. The Tax Cuts and Jobs Act (TCJA) expands even further bonus depreciation for property placed in service after September 27, 2017. This is good news for most businesses.
Previous law
Under pre-TCJA law, businesses could claim a first-year bonus depreciation deduction equal to 50% of the basis of qualifying new assets placed in service in 2017. The deduction was available for the cost of qualifying new assets, such as computers, purchased software, vehicles, machinery, equipment, and office furniture. However, neither used assets nor real property qualified for the bonus depreciation deduction.
A business could also claim 50% bonus depreciation for qualified improvement property (QIP). QIP is generally defined as any qualified improvement to the interior portion of a nonresidential building if added after the building was placed in service. QIP costs didn’t include costs for the enlargement of a building, an elevator, an escalator, or a building’s internal structural framework.
TCJA changes
The TCJA allows 100% first-year bonus depreciation for qualifying assets placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentage will begin to phase out in 2023, dropping 20% each year for four years until it expires at the end of 2026.
To qualify for 100% bonus depreciation, property generally must meet all of the following criteria:
- Fall within the definition of qualified property (defined below)
- Be placed in service between September 28, 2017, and December 31, 2022
- Be acquired by the taxpayer after September 27, 2017
Qualified property
Under the proposed regulations, “qualified property” for bonus depreciation purposes is defined to include the following:
- Tangible personal property with a tax life of 20 years or less
- Certain computer software
- Water utility property
- Qualified film or television productions
- Qualified live theatrical productions
- Specified plants
For 100% first-year bonus depreciation, it also includes QIP acquired after September 27, 2017, and placed in service before January 1, 2018.
Congress intended for QIP placed in service after 2017 to have a 15-year MACRS (Modified Accelerated Cost Recovery System) recovery period, which would make it eligible for bonus depreciation. However, due to a drafting error, the 15-year recovery period for QIP isn’t reflected in the statutory language of the TCJA. Absent a technical correction to fix this glitch, QIP placed in service after 2017 is ineligible for bonus depreciation.
Acquired used property and date of acquisition
The proposed regulations provide that the acquisition of used property is eligible for bonus depreciation if the property wasn’t used by the taxpayer or a predecessor at any time prior to acquisition of the property. Property is treated as used by the taxpayer or a predecessor before acquisition only if the taxpayer or a predecessor had a depreciable interest in the property at any time before the acquisition, regardless of whether the taxpayer or predecessor actually claimed depreciation.
The TCJA states that property won’t be treated as acquired after the date on which a “written binding contract” is entered into for the acquisition. The proposed regulations clarify that the closing date, delivery date, or other such date is irrelevant when determining the date of acquisition—only the date the contract is entered into matters for this purpose.
Plan carefully
Though the TCJA allows a 100% bonus depreciation deduction on qualifying assets, it may not always be beneficial to take the additional deduction. A business may elect out of bonus depreciation in any given year. Therefore, it is important to take a “big picture” approach and determine the most favorable tax position given all of the facts and circumstances.
For more information regarding the bonus depreciation deduction, or if you have questions on how it applies to your organization, contact a PYA executive below at (800) 270-9629.
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