Posted by Fred Lake

Bonus Depreciation Extension Under the TCJA (Tax Cuts & Jobs Act)

Bonus Depreciation Extension Under the TCJA (Tax Cuts & Jobs Act)

When you buy personal effects for your business, such as a car or a computer, that last more than a year, you should gradually deduct the cost over several years. This process is called depreciation. Depending on the property involved, it can take anywhere from three to thirty-nine years to fully recover the cost of a commercial property.

In an ongoing effort to help small businesses, small business owners can claim the first year premium depreciation for qualifying personal property used for business purposes. With bond depreciation, a certain percentage of the cost of an asset can be deducted in the first year in which it was acquired, and the residual cost can be deducted over multiple years using depreciation or regular expenses of Section 179. For tax years 2015 to 2017, the bonus depreciation for the first year was set at 50%. It was slated to drop to 40% in 2018 and 30% in 2019 and won't be available from 2020 and beyond.

The TCJA, adopted at the end of 2018, increases the depreciation of the first-year bonus to 100%. It is effective for all long-term assets put into service after September 27, 2017. The value of the depreciation of the 100% bonus remains in effect from September 27, 2017, to January 1, 2023. Therefore after the depreciation of the first year, the bonus is reduced as follows:

  • 80% for buildings commissioned after December 31, 2022, and before January 1, 2024.

  • 60% for buildings commissioned after December 31, 2023, and before January 1, 2025.

  • 40% for buildings commissioned after December 31, 2024, and before January 1, 2026.

  • 20% for buildings commissioned after December 31, 2025, and before January 1, 2027.

Bonus depreciation is optional; you don't have to accept it if you don't want to. But if you want to get the highest possible depreciation deduction, take advantage of this option whenever possible. You can also use the depreciation premium to increase the amount of first-year depreciation available for commercial vehicles by $8,000.

The property is eligible for bonus depreciation only if:

  • It has a useful life of 20 years or less (this includes all kinds of personal, tangible assets and software that you buy, but not real property 

  • You buy it from someone who is not your relative (it cannot be a gift or an inheritance).

Under the old law, bonus depreciation could only be used for new properties. The TCJA changed this rule, and you can now use bonus depreciation on new or used property purchases from 2018.

Also, if the asset is listed as an asset, it must be used more than 50% of the time for the business to benefit from further depreciation. The listed property consists of cars and other personal effects. Computers were listed as property by the previous law, but as of fiscal 2018, they are no longer classified as property on the list, so there is no more than 50% use.

Bonus depreciation differs in some important ways from section 179:

  • It is not subject to an annual dollar limit

  • The property should not be used more than 50% of the time for business purposes unless it is "listed property," such as cars, rooms, and other personal effects 

  • It is not limited to the annual profits of the company.

Often the same asset will be eligible for section 179 expenses and bonus depreciation. If so, decide which method to use, or you can choose to combine depreciation methods. Suppose you decide to claim the expenses in section 179 and the depreciation of the bonus for the same property. In that case, you must first use section 179, then the depreciation of the bonus, and then the regular depreciation (if necessary).

Placed in service rule

You can take full advantage of Section 179 and the bonus depreciation if you have purchased a qualifying property for your business at any time during the fiscal year. Unlike normal depreciation, there is no need to reduce the deduction if you bought a property at the end of the year.

However, Section 179 and bonus (and regular) depreciation are only available for commercial properties brought into production during the fiscal year. The property is "placed in service" when it is ready and available for the role assigned to your business. It is unnecessary to use the business property during the year to take depreciation as long as it is available for such use.

Example 1: John, a real estate agent, bought a camera to take pictures of properties for sale. He had the device ready for use in his office on November 1, 2019. However, he did not have any photographic property until 2020. John can take Section 179 or deduct bonus room depreciation for 2019, although this is not the case, as he did not use it that year because it was ready and available at that time.

On the other hand, if you bought a property but didn't put it into use that year, you can take no section 179 or bonus or regular capital cost allowance for it.

Example 2: John also bought a new computer for his business. He purchased and paid for the computer online on December 28, 2019. However, the computer was not shipped until January 2, 2020 so John cannot deduct any part of the cost of the computer on his 2019 return and had to wait until 2020 to make this deduction.



Fred Lake
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