New Tax Law Allows 100% Depreciation

DOIhttp://doi.org/10.1002/jcaf.22340
Published date01 April 2018
Date01 April 2018
169
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22340
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IRS
New Tax Law Allows 100% Depreciation
Shirley Dennis-Escoffier
The Tax Cuts and Jobs Act
(TCJA) not only increases
expensing limits under Internal
Revenue Code (IRC) Section
179, but temporarily increases
50% bonus depreciation to
100%. Unlike IRC Section
179 expensing, bonus depre-
ciation is not subject to dollar
limits. The increase to 100%
bonus depreciation was made
retroactively so that taxpayers
purchasing qualifying assets in
late 2017 may be able to benefit
from the faster write off on
their 2017 tax returns. These
changes are very good news for
taxpayers.
BONUS DEPRECIATION
For most tangible property,
the tax depreciation deduction
is determined under the modi-
fied accelerated cost recovery
system (MACRS) which usu-
ally assigns a recovery period
based on the asset’s class life.
Congress originally introduced
the concept of first-year bonus
depreciation to provide an
incentive for taxpayers to pur-
chase new equipment after the
September 11th terrorist attack.
Since then, the bonus deprecia-
tion percentage has been raised
and lowered numerous times
with 50% bonus depreciation
extended through 2017 and
then scheduled to gradually
phase out.
To qualify for bonus depre-
ciation under the pre-TCJA
rules of IRC Section 168(k), the
property had to be new prop-
erty other than a building; used
equipment was not eligible. For
property acquired before Sep-
tember 28, 2017, bonus depre-
ciation is equal to 50% of the
adjusted basis of the qualifying
property. Adjusted basis is the
property’s cost or other basis,
multiplied by the business use
percentage and reduced by any
amount expensed under IRC
Section 179. The adjusted basis
of qualified property is then
reduced by the bonus deprecia-
tion before computing the regu-
lar MACRS depreciation.
Example 1: In August
2017, Alpha Corpora-
tion (a calendar year
taxpayer) purchased
$2,800,000 of 5-year
new equipment used in
its business. Alpha’s
depreciation expense for
2017 is $1,680,000; this
consists of $1,400,000
($2,800,000 × 50%)
bonus depreciation and
$280,000 [($2,800,000 –
$1,400,000) × 20%]
regular MACRS first-
year depreciation.
The new 100% bonus
depreciation applies to quali-
fied property placed in service
after September 27, 2017 and
before January 1, 2023 (before
January 1, 2024 for certain
property with a long produc-
tion period and certain trans-
portation property). Bonus
depreciation then decreases to
80% for property placed in ser-
vice in 2023, 60% for 2024, 40%
for 2025, and 20% for 2026;
bonus depreciation will expire
at the end of 2026. By choos-
ing to make the 100% write
off retroactive to September
2017, Congress provided a huge
tax windfall to businesses that
made purchases in late 2017. It
is important to note that unlike
IRC Section 179 expensing
(discussed later), there are no
dollar limits so businesses of
all sizes can benefit from this
provision.
Example 2: In October
2017, Beta Corpora-
tion (a calendar year
taxpayer) purchased
$7,000,000 of new prop-
erty eligible for bonus
depreciation. Beta can
completely write off the

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