Investing in Your Business is Still a Powerful Year-End Tax Planning Strategy

With the end of the year rapidly approaching, many business owners are wondering what they can do to reduce their income taxes. One of the best strategies continues to be investing in business assets that will provide large depreciation-related deductions. In fact, such investments could provide larger deductions in 2018 than in 2017, thanks to the Tax Cuts and Jobs Act (TCJA).

Bonus depreciation eligible for 100%

Due to TCJA enhancements, bonus depreciation may be the most powerful year-end tax planning tool available to you. For the last several years, businesses could immediately deduct 50% bonus depreciation on qualified new property purchased and placed in service that year. Eligible property included new computer systems, off-the-shelf software, machinery, equipment, office furniture and qualified improvement property (QIP, generally defined as interior improvements to nonresidential real property).

The TCJA expands bonus depreciation. Businesses can now deduct 100% of the cost of such property. The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017 through Jan. 1, 2023. This is one of the few provisions of the TCJA that is retroactive to 2017. The bonus depreciation deduction will then be reduced annually beginning by 20% until it is fully phased out as of January 1, 2027.

The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017 and placed in service before Jan. 1, 2018, remains at 50 percent.

The definition of “qualified property” eligible for 100 percent bonus depreciation now includes “used” property. To be eligible, property must have a depreciable life of less than 20 years, and this must be the first use of the property by the owner.

Unfortunately, due to a drafting error in the TCJA, QIP won’t be eligible for bonus depreciation without a technical correction by Congress. Perhaps a future technical correction will enable qualified improvement property (QIP) to qualify for the 100% depreciation, especially for qualified retail improvement property or qualified restaurant property with a 15-year depreciable life.

Before making any purchases with the intent of enjoying 100% bonus depreciation, be aware that, under the TCJA, some businesses may no longer be eligible. Certain auto dealerships are an example, as are real estate businesses that elect to deduct 100% of their business interest.

Sec. 179 expensing expanded for rental properties

For business assets you’d like to invest in that don’t qualify for 100% bonus depreciation, see if they’ll qualify for Section 179 expensing. This break allows as much as a 100% immediate deduction for qualified asset purchases, and it also has been enhanced by the TCJA. For example, the TCJA extends Sec. 179 expensing to QIP as well as to certain improvements to nonresidential real property, specifically roofs, HVAC, fire protection systems, alarm systems and security systems.

And the new tax law nearly doubles the maximum deduction for qualifying property (from $510,000 in 2017) to $1 million for 2018. The break continues to phase out dollar for dollar when assets exceed a phase-out threshold, but the TCJA increases the threshold to $2.5 million for 2018 (from $2 million). The maximum deduction remains limited to the amount of income from business activity.

The eligible property has now expanded for rental properties. This means the owners of either residential rentals or non-residential rentals for “qualified improvement property” can now take Section 179. However, Section 179 cannot be used to create a loss, so this expanded provision may not be as useful as it sounds especially for small business owners.

Limits for luxury autos expended

The new law changed depreciation limits for passenger vehicles placed in service after Dec. 31, 2017.

If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction on luxury automobiles and personal use property is:

  • $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.

If a taxpayer claims 100 percent bonus depreciation, the greatest allowable depreciation deduction on luxury automobiles and personal use property is:

  • $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.

The new law also removes computer or peripheral equipment from the definition of listed property. This change applies to property placed in service after Dec. 31, 2017.

First-year depreciation for cars increased to $10,000, plus allowable bonus deprecation of $8,000, for a total of $18,000. Under the old law, the maximum including bonus was $11,160. For SUVs and trucks over 6,000 pounds, the Sec. 179 limit of $25,000 remains intact, but they are still eligible for 100 percent bonus depreciation, allowing you to immediately expense the full cost of the SUB in the year of purchase.

Consideration

These changes to depreciation will be a great addition to your tax-saving strategies.

To be eligible for 100 percent bonus depreciation, property must have a depreciable life of less than 20 years, and this must be the first use of the property by the owner. For the first time, used property will be eligible for bonus depreciation if it’s still being used for the first time by that owner.

The advantage of bonus depreciation over Section 179 is that it can be still used to create a loss. Section 179 deductions are disallowed to the extent of any loss they cause. Another advantage of bonus depreciation over Section 179 is that there are no limits to the amounts of the deduction, except for automobiles as mentioned earlier.

Whether and when to make investments in your business are just a couple of issues to consider in your year-end tax planning. Your tax advisor can help determine your best moves.