Take Advantage of Deductions for Business Investments
The U.S. tax code generally encourages investments made to strengthen or grow a business. In 2018, the Tax Cuts and Jobs Act (TCJA) made it possible to write off the full cost of large asset purchases in the first year with Section 179 deductions and/or bonus depreciation. This includes eligible vehicles, up to certain limits.
In March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded the deduction available to businesses that invest in qualified improvement property. This tax benefit may be important for companies that had to reconfigure office or retail space, remodel restaurant dining areas, or make other improvements for coronavirus safety reasons in 2020.
Your tax professional can help you determine which of your investments might be eligible for Section 179 expensing, bonus depreciation, or both.
Stacking Tax Breaks
When applying these provisions, Section 179 is generally taken first.
Cost of equipment purchased in 2020 $2,000,000
Section 179 deduction $1,040,000
Bonus depreciation deduction $960,000
Estimated tax savings (based on 32% tax bracket) $640,000
*The maximum Section 179 amount for 2021 is $1.05 million, with a phaseout threshold of $2.62 million.
A deduction for depreciation may be taken on business assets that will become obsolete or wear out over time, such as business vehicles, machinery, computers, and furniture. The cost is capitalized over a set period of years according to the modified accelerated cost recovery system.
To incentivize business spending, the TCJA allows 100% first-year bonus depreciation for qualifying new and used assets acquired and placed in service between September 28, 2017, and December 31, 2022. Used assets must be new to the taxpayer.
Section 179 Expenses
Under IRC Section 179, small businesses may elect to expense the cost of qualifying property purchased and put in use during the current tax year, rather than recovering the costs over time through depreciation deductions. In general, qualifying property is defined as depreciable tangible personal property that is used for business purposes more than 50% of the time.
In 2020, the maximum amount that can be expensed is $1,040,000, and the deduction phases out when property placed in service exceeds $2,590,000.
Qualified improvement property (QIP) is a new classification created by the Tax Cuts and Jobs Act that consolidated and replaced three previous classifications: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. QIP includes many types of nonstructural improvements made by the taxpayer to the interior of a nonresidential building after the building itself is placed in service, such as drywall, ceilings, interior doors, mechanical, electrical, and plumbing.
A drafting error (dubbed “the retail glitch”) set the depreciation recovery period for QIP at 39 years. The CARES Act shortened the recovery period to 15 years and made QIP investments eligible for 100% first-year bonus depreciation. This change was retroactive, so businesses can benefit from the same favorable tax treatment — or possibly get a refund — for qualifying improvements made in 2018 and 2019.