The Tax Cuts and Jobs Act increased the dollar limits on the immediate deductibility of certain capital assets placed in service during the tax year. Before determining whether accelerated depreciation is beneficial, it is important to consider whether the asset purchased must be capitalized. In order to do so, a review of the tangible property regulations is necessary. Under the regulations, a unit of property is defined as all components that are functionally interdependent. This means that if the placing in service of one component depends on the placing in service of another component, these components are generally part of one unit of property. Buildings are broken down into building systems such as the electrical, plumbing, and HVAC system. Each of these systems is a separate unit of property which must be capitalized.
Once the unit of property is determined, a de minimis safe harbor election can be made to expense smaller assets. For taxpayers with an audited financial statement and a written capitalization policy, items costing $5,000 or less (applied per invoice or per item if multiple assets are listed on one invoice) can be expensed. Without an audited financial statement, the limit is $2,500. An election statement must be attached to the taxpayer’s tax return in order to expense assets under the above thresholds. Materials and supplies that either cost $200 or less per item or have an economic useful life of one year or less can also be expensed.
Larger assets not qualifying for the de minimis safe harbor election may be written off by taking advantage of higher Section 179 limits under the Tax Cuts and Jobs Act. Assets totaling $1,000,000 can be written off immediately effective January 1, 2018. The deduction limit was $510,000 for 2017. An asset must be used for business purposes at least fifty percent of the time to qualify for Section 179. Real property and vehicles are generally not eligible for Section 179 with the following exceptions. The Tax Cuts and Jobs Act expanded the eligible assets for deduction to include any of the following improvements to nonresidential real property: roofs, heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. Vehicles with a gross vehicle weight rating of 6,000 pounds or more are eligible for immediate write-off up to an annual limit of $25,000. If total assets placed in service during the year exceed $2,500,000, there is a dollar for dollar phase out of the $1,000,000 threshold. The Section 179 deduction is also limited to taxable income. Any disallowed deduction can be carried forward indefinitely.
Finally, any capital assets not expensed under the de minimis safe harbor or Section 179 may be eligible for Section 168k bonus depreciation. The cost of qualifying assets acquired and placed in service after September 27, 2017 is 100% deductible. The 100% limit will be reduced to 80% in 2023 and will phase out each year until bonus depreciation is no longer available in 2027. Property with a useful life of twenty years or less is eligible. Under the Tax Cuts and Jobs Act, previously used assets now qualify for the bonus depreciation deduction. Listed property, such as passenger automobiles that are used fifty percent or less for business do not qualify. Luxury autos are subject to an $18,000 first year limit if the taxpayer does not elect out of bonus depreciation. Unlike Section 179, there is no taxable income limitation, investment limitation, or limit on the total amount deductible. However, many states do not allow bonus depreciation deductions. The bonus depreciation deduction is claimed on the cost of the property after reduction for any Section 179 deduction. Regular MACRS deductions are computed on the remaining cost after reduction for any Section 179 and Section 168k bonus depreciation taken.