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Act Now: Tax Reform Depreciation Impact

January 02, 2018

The recently enacted Tax Cuts and Jobs Act will impact the computation of depreciation expense and the treatment of tangible property. Among the changes are: 

  • Implementation of 100 percent bonus depreciation as of September 28, 2017, through 2022 (subject to exceptions for property used in a trade or business that has floor plan financing debt and property used in providing certain utility services)  
  • Phase down of the bonus depreciation percentage by 20 percent each year during years 2023 through 2026
  • An increase in the Section 179 expensing limitations to $1 million with a phase-out threshold of $2.5 million along with an expansion of qualifying property
  • Removal of the election to claim prior year minimum tax credits in lieu of bonus depreciation
  • Modification to the limitations on luxury automobiles
  • Modifications to the recovery periods for property used in a farming business
  • Repeal of qualified leasehold, qualified restaurant, and qualified retail property designations
  • Modification to ADS recovery periods for various items of property

NOTE – The statutory language does not reflect the intended 15-year recovery period for qualified improvement property. Without a technical correction, qualified improvement property placed in service in 2018 will be 39-year property not eligible for bonus depreciation.

The original Senate bill included a modification of recovery periods for nonresidential real and residential rental property to 25-years, but this was removed during the committee process to retain the current 39-year and 27.5-year recovery periods. In addition, it was proposed that qualified improvement property have a 10-year recovery period within the Senate bill but this was also modified by the conference committee to a 15-year recovery period.

Property eligible for the immediate expensing under Section 179 would include previously qualified property, along with certain improvements to nonresidential real property such as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems.

Impact on Repair and Maintenance Expenses and the Tangible Property Regulations
With the 100 percent expensing provisions discussed above, the determination of repair and maintenance activities, as opposed to what would be required to be a capitalized, becomes a less crucial determination. Although identifying the unit of property will still be important, the ability to fully expense the activity through utilizing the 100 percent bonus depreciation provisions reduces the risk of taking an invalid position by expensing the activity as a repair and maintenance item.

Action Items
With the changing tax landscape, it is important to consider how these and other factors may impact you and your business. Not only is it important to prospectively analyze the potential for change, the lower tax rates warrant a backward look as well. Since depreciation is an accounting method, accelerating deductions into years with higher tax rates could result in permanent savings. If you have property that has not been analyzed to ensure the most advantageous depreciation methods are being utilized, now may be the time to take another look.

Please contact your Eide Bailly representative or a member of the cost segregation team to discuss what opportunities or planning strategies may be available.