Can I Expense My Business Fixed Asset Purchases in 2018?
As tax season is underway, we inevitably receive many complex questions from our clients. Over the years we have seen some of the same questions come up time and time again. As such, we’ve put together tips for the most commonly asked tax questions to help you navigate tax season. Should you have questions relating to your specific situation, please do not hesitate to reach out to us for more detailed analysis and guidance.
Can I expense my business fixed asset purchases in 2018?
Your business purchased new computers, furniture and made a few office upgrades during the year. For your GAAP books you are depreciating the expenses over the set period of useful life. Since we are nearing the end of the year, you are wondering if there is any way to lower your taxes in 2018. You are in luck. With the passage of the 2017 tax reform, Congress extended and improved accelerated tax depreciation methods available to taxpayers under Section 179 and Section 168, better known as bonus depreciation. Both methods are available in addition to regular MACRS tax depreciation. What is nice about choosing the right tax depreciation method is that the decision does not have to made before the end of the year, but a taxpayer has time to make a decision up until the tax return is filed.
Now as to the specifics of the depreciation. Section 179 allows a deduction of the total cost of certain assets placed in service during the year. For 2018, up to $1,000,000 of assets purchases can be deducted; however, the deduction is limited dollar-for-dollar if purchases exceed $2,500,000. A taxpayer that purchased more than $3,500,000 will not be able to take advantage of the deduction at all. In addition, taxpayers cannot be in a loss position or create net operating losses with Section 179 deduction.
Not all assets that are purchased qualify for the deduction under Section 179, but most tangible personal property, computers, office furniture and equipment, “off-the-shelf” software, property attached to a building that is not a structural component, certain improvements to non-residential buildings such as alarms and security systems, HVACs and roofing. Cars are also eligible, however, depending on the car, not the entire value may be eligible for a deduction in the initial year.
One major change that came out of tax reform is that now even used qualified equipment is deductible as long as it is new to the taxpayer. It’s also notable that Section 179 depreciation is made on an asset-by-asset basis and can be used by the taxpayer in the most advantageous way.
The other tax specific depreciation method is bonus deprecation. Bonus depreciation allows the deduction of a certain percentage of an asset’s cost in the year it is placed in service. While bonus depreciation has been around for a while, the percentage of the deduction has fluctuated over the years. With the tax reform act 2018 bonus depreciation is set at 100% again, essentially allowing for a write-off in the year of purchase. Like Section 179, bonus depreciation may be taken on a variety of assets. Generally, assets that have a shorter tax depreciation life of 20 years, certain computer software, and qualified film or television productions and live theatrical productions are eligible, to name a few.
Similar to Section 179 property, previously used property that is new to the taxpayer and has not previously been used by the taxpayer is eligible for bonus depreciation. Unlike Section 179, bonus depreciation applies to all eligible property. A taxpayer has the option to elect out of bonus depreciation for an asset class or on all asset classes, but this election to opt-out has to be included with the originally filed tax return.
Now that we covered the basics on accelerated tax depreciation method, you may wonder if there is really a difference between electing Section 179 and bonus depreciation. Unfortunately, the answer as so often in the tax world is most likely that it depends on the taxpayer’s facts and circumstances. However, from a state perspective it might matter. Not all states follow bonus depreciation, but most states allow some amount for Section 179 depreciation, although the dollar amount may differ from the federal deduction. Thus, it may be beneficial to maximize Section 179 depreciation if that means a larger state depreciation deduction. Federal tax law still allows bonus depreciation on asset for which Section 179 was not claimed.
While reducing taxable income in the current year might be appealing most times, there are also certain instances, where against common perception, this may not be the case. For example, taxpayers that are carrying net operating losses from pre-2018 tax years may be better off, utilizing as much of their NOLs since these still have expiration dates. Taxpayers that are carrying now refundable AMT credits, might also want to increase their taxable income. AMT credits will first offset taxable income up to 100%, with the excess AMT credit carryover being refundable. What might come as a surprise however, is that the AMT credits may be subject to mandatory limitations through the Balanced Budget and Emergency Deficit Control Act unless they are overwritten by Congress. So using as many credits in the current year to offset taxable income rather than receiving a refund will be beneficial.
So while the decision on the method of depreciation does not have to be made until much later, taxpayers that want to maximize depreciation deductions, may want to consider accelerating purchases into 2018.