Leveraging the new tax law
The Tax Cuts and Jobs Act of 2017 enhances tax-deduction strategies for companies considering capital investments. Companies can take advantage of the new law's changes impacting both bonus depreciation and the application of Section 179 of the Internal Revenue Code.
If you like the idea of whittling down your company's 2018 tax bill and you have capital expenditures in mind, there's still time before year-end to execute a plan to take advantage of enhanced tax-deduction opportunities.
The new tax law increases the allowable bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
For the next five years companies can write off the full cost of qualified capital assets in the year in which they are acquired and placed into service. What's more, the amount of bonus depreciation a taxpayer can claim in any particular year is not limited to a maximum amount.
Generally, property with a depreciable recovery period of 20 years or less is eligible for tax bonus depreciation. Used property is now also eligible.
For those who plan to take advantage of bonus depreciation this year, the savings can be impressive. For example, a company with $1 million in taxable income that purchases $500,000 of qualifying equipment this year could see potential savings of $105,000 on its 2018 tax bill.
A second potential avenue for taxpayers to immediately write off the cost of an acquired capitalized asset is afforded by Section 179 of the tax code. This provision allows a business to deduct, for the current tax year, the full purchase price of equipment and off-the-shelf software that qualifies for the deduction.
Before the new tax law was enacted, Section 179 limited immediate expensing to a maximum deduction of $500,000, with the balance being subject to depreciation. However, Section 179 now allows for immediate expensing of up to $1 million of qualified property placed in service in taxable years beginning after Dec. 31, 2017.
Note that the $1 million limit on the deduction starts shrinking once a company puts more than $2.5 million in qualified property into service.
The lack of a maximum dollar amount for bonus depreciation, in contrast with the phase-out provision of Section 179, is expected to make bonus depreciation a more popular tax-deduction strategy for the foreseeable future, particularly for larger companies.
Even so, Section 179 remains an important tax-deduction option, as it can be used for certain assets not eligible for bonus depreciation (e.g., certain improvements to nonresidential real property).
The need for timely planning
If you have a capital equipment need and want to use either of these enhanced tax-deduction strategies to lower your company's 2018 tax bill, you will need to develop a plan and make your capital investment by Dec. 31, 2018.
To verify the benefits of bonus depreciation or Section 179, consult with your tax advisor or accountant. Your banker can also provide counsel on related equipment finance strategies.
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The information and figures contained in this document are samples for discussion purposes only and may not be applicable to your business. To verify the benefits of Section 179 or Bonus Depreciation, please consult with your tax advisor or accountant before engaging in the purchase or acquisition of equipment in which the benefits of Section 179 or Bonus Depreciation are a major factor in your decision.
The information provided should not be considered as tax or legal advice. Please consult with your tax advisor and/or attorney regarding your individual circumstances.
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