New Tax Law Allows 100% Depreciation

• Author: Shirley Dennis‐Escoffier
• DOI: http://doi.org/10.1002/jcaf.22340
• Published date: 01 April 2018
• Date: 01 April 2018

169

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22340

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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