The Tax Cuts and Jobs Act of 2017 (tax reform) ushered significant changes to the tax code to make it easier to navigate and less complex. Since the close of the 2018 tax season, many Denver businesses have been looking more closely at these modifications to see how to enhance their savings. Some of the changes resulted in an immediate benefit including the reduction of the corporate tax rate to 21%, accounting method simplification rules and the Qualified Business Income Deduction. Concurrently, changes were made to the deduction for meals and entertainment expenses, virtual elimination of Net Operating Loss (NOL) carrybacks and limitations on the deduction for fringe benefits. While some changes were expected it doesn’t mean the opportunity for savings is limited. In fact, many companies should look to depreciation (including bonus depreciation) as a tax savings tool. To help clients, prospects and others understand the changes and how it may impact them, Hanson & CO has provided a summary of key points below.

Increased Depreciation Limits
Under tax reform, businesses are permitted to expense the cost of any Section 179 qualified property (i.e. machinery, equipment, etc.) and deduct the expense in the year the property was placed into service. There was an increase in the deduction amount from $500,000 to $1M and an increase in the phase-out threshold from $2M to $2.5M.

There were also changes to the definition of Section 179 property, allowing qualified improvement property, (i.e. improvements to a building’s interior) to qualify for depreciation. Examples of these include roofs, HVAC, fire alarm and security systems. Three important exceptions to note include building enlargement, the addition of an elevator/ escalator, or changes to the internal structural framework.

First-Year Bonus Depreciation
Bonus depreciation has been used for years by many Denver companies to create additional tax savings. Tax reform has expanded the benefit received increasing the depreciation amount from 50% to 100%. This includes any qualified property that was acquired and placed in service after Sept. 27, 2017. Unfortunately, the bonus depreciation percentage for qualified property acquired and placed into service before September 28, 2017 remains at 50%.

Expanded Benefit
The law also expanded eligibility for 100% bonus depreciation to include used qualified property acquired and placed into service after September 27, 2017. It’s important to note the following factors need to be satisfied in order to qualify, including:

  • The property was not used by the taxpayer prior to acquisition.
  • The property was not acquired from a related party.
  • The property was not acquired from a component member of a controlled group of corporations.
  • The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
  • The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.

Limited Timeframe
While the Section 179 limitations were permanently expanded, the same cannot be said for first-year bonus depreciation. Note the gradual phase-out begins at 20% starting in 2023. The bonus depreciation program is scheduled to expire after 2026 (unless extended).

Depreciation Limits on Luxury Vehicles
In situations where a business taxpayer doesn’t claim bonus depreciation for passenger vehicles placed into service after December 31, 2017, the maximum allowable depreciation deductions have changed. Under the new law the following limits apply:

  • $10,000 for the first year,
  • $10,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

In situations where the business taxpayer doesn’t claim the 100% bonus depreciation, the maximum limits have also changed. The following limits apply:

  • $18,000 for the first year,
  • $16,000 for the second year,
  • $9,600 for the third year, and
  • $5,760 for each later taxable year in the recovery period.

Contact Us
The changes to depreciation rules mean that Denver businesses may be able to deduct part or all of their qualifying property expenses in the same year its placed into service. This means that Denver companies in the construction, healthcare, and real estate industries have a powerful tax savings opportunity at their disposal. If you have questions about the new depreciation rules or need assistance with a tax or financial issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.