Taking full advantage of depreciation tax breaks is a time-honored tradition for construction company owners. And this year is no different.In fact, it’s even more potentially beneficial under the changes wrought by the Tax Cuts and Jobs Act (TCJA). So, now’s a good time to see whether and how you can put Section 179 expensing and the bonus depreciation deduction into action.
Expensing under Sec. 179
Need new light or heavy equipment for your jobsites? How about upgrading your accounting or project management software? Time to finally expand or remodel the home office? Generally, you must “capitalize” such purchases — in other words, spread the deductions for capital expenditures over several years.
But the two tax breaks in question allow you to accelerate these deductions for tax purposes, and the TCJA has expanded them. Let’s start with Sec. 179: The TCJA permanently increased its expensing limit for qualifying fixed asset purchases from $510,000 in 2017 to $1 million in 2018 and beyond. However, this break is phased out for qualifying purchases over $2.5 million in 2018 (up from $2.03 million in 2017). Going forward, these amounts will be indexed for inflation.
Sec. 179 expensing for fixed asset purchases is phased out on a dollar-for-dollar basis for purchases that exceed the threshold amount. So, no Sec. 179 deduction is available if your total investment in qualifying property is above $3.5 million for 2018.
What types of assets qualify? Examples include machinery, equipment, vehicles and furniture. The
TCJA also expands eligible real property improvements to include roofs, HVAC equipment, and fire protection and security systems as long as they’re in nonresidential real property.
With the permanent extension of the increased Sec. 179 expensing limit, you can now plan your annual capital expenditure budget with more certainty. If you’re thinking of spending up to $1 million this year on qualifying fixed assets, you might want to make purchases and place the assets in service before the end of the year.
Deducting under bonus depreciation
Another tax break related to asset purchases ― bonus depreciation ― has also been expanded. Under the old rules, businesses could deduct 50% of qualified property additions in the first year of service for 2017. Under the TCJA, companies are now allowed to fully deduct capital expenditures made after September 27, 2017, and no later than December 31, 2022.
Unlike Sec. 179, bonus depreciation isn’t subject to any spending limits or phaseout thresholds. In addition, the new law expands the break to include new and used property, removing one of bonus depreciation’s former disadvantages compared to Sec. 179 expensing.
Unfortunately, the bonus depreciation break will sunset, starting in 2023, as follows. It drops to 80% for qualifying property placed in service after December 31, 2022, and before January 1, 2024, and then to 60% for qualifying property placed in service after December 31, 2023, and before January 1, 2025.
For qualifying property placed in service after December 31, 2024, and before January 1, 2026, the percentage generally drops to 40%, and then to 20% for qualifying property placed in service after December 31, 2025, and before January 1, 2027.
Qualifying property includes most Modified Accelerated Cost Recovery System property with a recovery period of 20 years or less, computer software and qualified improvement property. In addition, special rules apply to vehicle purchases and certain real property.
In the past, some corporations chose to accelerate their alternative minimum tax (AMT) credits instead of taking bonus depreciation for assets they acquired. However, that option is no longer available under the new law, because the TCJA repealed the corporate AMT.
Claiming what you can
As always, you don’t want to run out and buy stuff just to claim a tax break. But if asset acquisitions are in your construction company’s immediate future, work closely with your Castellano, Korenberg & Co. tax professional to claim what you can under the TCJA.