The Tax Cuts and Jobs Act makes significant changes to how companies will be able to write-off certain assets.
Prior Law
Through December 31, 2017
Taxpayers may elect to deduct the full cost of certain assets in the year that the asset is placed in service. The maximum amount a taxpayer could expense is $500,000 reduced by the amount of qualifying assets placed in service in excess of $2,000,000. To qualify for the expense, the asset must be used in a trade or business (not a rental or other passive activity) and include depreciable tangible property, off-the-shelf computer software and certain qualified real property.
New Law
Effective for tax years beginning after December 31, 2017
The expense has been increased to $1,000,000 reduced by the amount of qualifying assets placed in service in excess of $2,500,000. These amounts will be increased by inflation beginning January 1, 2019.
The new law also expands Code Section 179 expenses to include “Qualified Real Property.” The definition of qualified real property now includes the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
Commentary
A disadvantage of Code Section 179 expensing is that it can only be used if the trade or business has taxable income for the year. The advantages to Code Section 179 expensing is that it is flexible. Code Section 179 expensing allows taxpayers to choose between individual assets as compared to bonus depreciation which also allows for a 100% write-off, but has to be elected for an entire class of assets. Another advantage of Code Section 179 expensing is that a business is able to partially write off an asset in the current year.
