The new and improved Section 179 deduction gives you more ways to take advantage of immediate tax deductions. It’s somewhat like having a flexible tax shelter in your back pocket for when you need it (and also need the property, of course).
As in years past, the Section 179 deduction is available for both new and used assets and offers you deduction flexibility, unlike bonus depreciation.
Now, thanks to the Tax Cuts and Jobs Act, you have up to $1 million in Section 179 deduction availability. You also have new Section 179 qualifying asset possibilities such as
- depreciable tangible personal property used predominantly to furnish lodging;
- the new definition of nonresidential qualified real property;
- the addition to the Section 179 category of nonresidential roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.
New—Bigger Maximum Deduction and Liberalized Phase-Out Rule
For qualified Section 179 property placed in service in tax years beginning in 2018 and beyond, the TCJA
permanently increases the maximum Section 179 deduction to $1 million (up from $510,000 for tax years beginning
in 2017). The IRS will adjust the $1 million limit for inflation in post-2018 years.
For tax years beginning in 2018 and beyond, the TCJA also permanently increases the threshold above which the
maximum Section 179 deduction begins to be phased out to $2.5 million (up from $2.03 million for tax years
beginning in 2017).
The IRS also will adjust the $2.5 million phase-out threshold for inflation in post-2018 years.4
This dollar-for dollar phase-out rule kicks in only if your Section 179 asset additions for the year exceed the threshold for that year.
Example. During 2018, your business places in service $2.7 million of Section 179 property. Your maximum
Section 179 deduction for 2018 is limited to $800,000 ($1 million – $200,000 excess over $2.5 million phase-out).
NEW—Section 179 Deductions Now Allowed for Property Used to Furnish Lodging
For tax years beginning in 2018 and beyond, the TCJA expands the definition of qualified property to include
depreciable tangible personal property used predominantly to furnish lodging.
Examples of such newly available Section 179 property include beds, other furniture, kitchen appliances, and other
equipment used in the living quarters of a lodging facility such as a rental home, apartment house, dormitory, or
other facility where sleeping accommodations are provided and rented out.
NEW—Section 179 Deductions Now Allowed for More Real Property Expenditures
The new law eliminates the old “qualified leasehold improvement property” and allows Section 179 deductions for
“qualified improvement property,” which means any improvement to an interior portion of a building which is
nonresidential real property if such improvement is placed in service after the date such building was first placed in
service.
But “qualified improvement property” does not include any expenditure that’s attributable to:
- the enlargement of the building,
- any elevator or escalator, or
- the internal structural framework of the building.
More good news: the TCJA also expands the definition of qualified real property to include any of the following
improvements to nonresidential real property placed in service after the date you first placed such property in
service:
- Roofs
- Heating, ventilation, and air-conditioning property
- Fire protection and alarm systems
- Security systems
Example. John spends $30,000 to replace the roof on his office building. His old roof had an undepreciated basis
of $11,000. John can write off $41,000 ($30,000 under Section 179 + $11,000 on the retirement of the old roof).
The big advantage to Section 179 deductions over bonus depreciation is flexibility. But bonus depreciation has its place as a tax strategy.
If you are planning on a number of asset additions this year, let’s spend a little time on your tax planning for those assets.