Tax Reform – Section 179 Deduction: Election to Expense Business Property
Editor’s Note: This article was originally published on April 4, 2018.
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 .
Depreciation and Tax Reform
Tangible property is generally depreciated based on an assigned depreciation method, recovery period, and convention. Due to tax reform changes under section 179, taxpayers will start following new equipment deduction rules.
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 (the 2017 deduction was $510,000). A phase-out on the expense election reduced the available amount dollar-for-dollar for property over $2 million, also adjusted for inflation ($2.03 million for 2017). 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 Changes With Tax Reform
With tax reform, the Section 179 deduction 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 definition of Section 179 property changes with tax reform to now 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.
Tax reform does not change other rules related to the section 179 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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