TCJA Depreciation Bonuses
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The depreciation period for commercial buildings and improvements is generally 39 years. During this period part of the cost can be depreciated each year. However, new tax breaks allow deductions to be taken more quickly are available for certain real estate investments.
The Tax Cuts and Jobs Act (TCJA) has enhanced many of these new breaks and can lead to a bigger benefit when filing for your 2018 tax return. However, a drafting error in the TCJA has prevented the use of a couple of these breaks.
Section 179 Expensing
Section 179 allows qualified improvement property to be deducted rather than depreciated. The TCJA has expanded the definition of qualified improvement property from qualified leasehold-improvement, restaurant and retail-improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property that is used primarily to furnish lodging for the following improvements to nonresidential real property: HVAC equipment, roofs, fire protection and alarm systems, and security systems.
Before the TCJA the accelerated depreciation break allowed a shortened recovery period of 15 years for property that qualified, including qualified leasehold-improvement, restaurant and retail-improvement property. The TCJA expanded this definition to include all “qualified improvement property.”
However, a drafting error in the TCJA has led to all property defaulting to the 39-year depreciation group. In order to use accelerated depreciation technical correction must be issued.
An additional first-year depreciation allowance is available for qualified assets. Before the TCJA this bonus included qualified assets, but due to a drafting error qualified improvement property is only eligible for bonus depreciation if a technical correction is issued.
When bonus depreciation is available it is increased from the previous 50% rate to 100% for qualified property in service after September 27, 2017, but before January 1, 2023. For the years 2023-2026 bonus depreciation is scheduled to be gradually reduced.
Be aware that under the TCJA real estate businesses that elect to deduct 100% of their business interest will be ineligible for bonus depreciation beginning in 2018.
Your best move
While the enhanced deprecation-related breaks can offer significant savings on your 2018 tax return, they may not be beneficial long term. If you take these deductions now, you will forego deductions that could be taken later under a regular depreciation schedule. In some instances, such as if your business is likely to move into a higher tax bracket in the next few years, the normal depreciation schedules could be a better choice.
We can discuss these tax breaks and determine whether using them is the best choice for your company.
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