The Tax Cuts and Jobs Act of 2017 (TCJA) has had a profound impact on how depreciation of qualified property can be expensed. There are some very strict factors that apply when determining eligibility of qualified property. It is important to consult with an advisor who understands these rules and asks you the right questions to ensure compliance with your business deductions.
Qualified property includes equipment and capitalized assets with a depreciable life of less than 20 years that is acquired and placed in service after September 27, 2017, and before January 1, 2023.
The law allows owners who purchase qualifying assets to potentially expense the entire cost within the first year. Note that the 100 percent bonus depreciation is a temporary rule that reduces to 80 percent in 2023 and will continue to decrease in the years that follow. Keep this in mind as you plan your asset investments.
The TCJA has opened up opportunity for performing cost segregation studies. A cost segregation study isolates fixed assets and reclassifies them into shorter-lived tax categories. This results in accelerated depreciation, tax deferral, and increased cash flow. The IRS also permits “look-back” studies. This allows taxpayers to retroactively claim all the depreciation that they would have received had they performed a cost segregation study when the property was originally placed in service.
The law does allow some expensing of real property in some situations. This includes certain qualified improvement property such as, roofs, HVAC systems, fire protection systems and security systems. Other real estate investments remain depreciable over the life of the asset with the exception of land, which remains non-depreciable. It is important to work with an advisor who can make sure that you are correctly claiming depreciation on qualified property within the guidelines of the tax law.
In most cases, bonus depreciation will be sufficient for most tax situations. However, some businesses may benefit from expensing equipment and property costs under Section 179, which provides more flexibility in certain situations.
In some cases, delaying the deduction, opting out of bonus depreciation and not electing to use Section 179 may be a better strategic position. If you are in growth mode and expect to be in a higher tax bracket in the near future, you may choose to delay depreciation until a tax year when you need more tax savings.
However, if you expect to remain in the same tax bracket for the foreseeable future, taking advantage of bonus depreciation prior to 2023 where applicable may be the best tax strategy.
Of course, businesses don’t make investments in qualifying assets solely to receive a tax deduction. Tax planning should coincide with strategic planning so that a planned investment is analyzed for any corresponding tax impacts.
When it comes to depreciation for either equipment or real estate investments, Anglin’s Tax Advisory Services team understands the complexity of depreciation options and strategies in today’s rapidly changing tax environment. Contact Christopher Cook or Andrew Labosier at 256-533-1040 for information or to schedule a time to discuss your property and equipment depreciation strategies.