Section 179 – 2018 Tax Reform: Election to Expense Property

April 04, 2018 : Brittany Benson – The Tax Institute

Generally, taxpayers must capitalize the cost of property they use in a trade or business, or property they hold for the production of income, and recover the cost over time through annual deductions for depreciation or amortization.

Depreciation and Tax Reform

Tangible property is generally depreciated based on an assigned depreciation method, recovery period, and convention. Due to the Tax Cuts and Jobs Act, taxpayers will start following new equipment deduction rules under section 179 in 2018.

Section 179 Deduction – Before Tax Reform

Under the old tax law, taxpayers (except for trusts, estates and certain others) could “write off” the cost of certain property placed in service during that tax year. Taxpayers could make the election, with some exceptions, for most tangible personal property, off-the-shelf computer software, and certain leasehold, restaurant and retail real property, if taxpayers used the property in an active trade or business.

The maximum deduction was $500,000, adjusted for inflation (for 2016 and later years). A phase-out on the expense election reduced the available amount dollar-for-dollar for property over $2 million, also adjusted for inflation (for 2016 and later years). The deduction was further limited to taxable income from the taxpayer’s active trades or businesses, but allowed the taxpayer to carry forward the excess indefinitely.

Section 179 Deduction – After Tax Reform

The Tax Cuts and Jobs Act (TCJA) allows taxpayers to write off certain tangible property costs for the tax year up to $1 million, and increases the phase-out threshold to $2.5 million. Both amounts will be indexed for inflation for tax years beginning after 2018. While the $25,000 sport utility vehicle limitation will remain at $25,000, this amount will be indexed for inflation after 2018.

Section 179 Changes to Property Eligible for the Deduction

The TCJA also expands the definition of Section 179 property to include:

  • Certain depreciable tangible personal property used primarily to furnish lodging (or in connection with furnishing lodging)
  • Improvements made to nonresidential real property: roofs, heating, ventilation, and air-conditioning property, fire protection, and alarm and security systems

These changes apply to property placed in service in taxable years beginning after December 31, 2017.

The new law does not change other rules related to the deduction. For example, amounts are subject to recapture for the entire recovery period of the property, and the depreciable basis of the property is reduced by the amount of the expense deduction.

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Brittany Benson – The Tax Institute