As projects heat up, construction company owners often find they must buy additional equipment or other assets to ensure project success and remain competitive. Because return on investment for high-dollar purchases can take years, finding the right tax deductions to help offset costs is critical to staying in the black.
The good news is that, thanks to a new and improved version of the bonus depreciation tax break, many businesses buying qualified assets in 2018 will be able to immediately deduct much more than in recent years for their capital expenses.
The important stuff
As you may recall, the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. Among its many changes, the law substantially increased the first-year bonus depreciation deduction from 50% to 100%.
You can apply bonus depreciation to the cost of vehicles, machinery, equipment, computer systems, software, office furniture and other assets that have a useful life of 20 years or less and that are purchased under certain conditions. In other words, they can’t be a gift or inheritance or bought from an ancestor or descendant, such as a child, parent, grandparent or grandchild.)
Another important change is that the deduction is now allowed for both new and used qualifying property. In the past, businesses couldn’t claim bonus depreciation for purchases of used property.
Businesses also can claim bonus depreciation for “qualified improvement property,” which is any eligible improvement made to the interior portion of a nonresidential property — if the improvement is placed in service after the date the building is placed in service. Similar to previous years, the following three improvements don’t qualify: 1) enlargement of a building, 2) elevator or escalator work, or 3) changes to the internal structural framework of a building.
If your business-related purchases don’t qualify for first-year bonus depreciation, the Section 179 deduction provides similar benefits.
Section 179 expensing and the TCJA
Like bonus depreciation, Section 179 expensing allows businesses a large deduction for certain business assets in the year they’re placed in service, rather than depreciating them over a longer period. It encourages companies to stay competitive by investing in needed equipment and writing off the cost on their tax returns. This deduction is tailored for small to midsize businesses, because it has a spending cap that larger businesses often will exceed.
Under previous tax law, the maximum deduction was $510,000, with a $2.03 million phase-out threshold for total equipment purchased in a year. Since this law is still applicable on your 2017 return, this means that you can deduct the full cost of qualified purchases (up to $510,000 for total asset purchases for the year) until $2.03 million is reached. Once that happens, the deduction decreases on a dollar-for-dollar basis and disappears entirely at $2.54 million.
The Tax Cuts and Jobs Act (TCJA) essentially doubles the deduction to $1 million while increasing the phase-out threshold to $2.5 million. At $3.5 million, the deduction disappears. These amounts will be indexed for inflation after 2018.
Nearly all types of business assets qualify for Sec. 179 expensing, including equipment, vehicles exceeding 14,000 pounds (vehicles weighing more than 6,000 pounds may be eligible for a partial Sec. 179 deduction), computers, software, and property attached to your building that’s not a structural component (such as large manufacturing tools and equipment). The TCJA also expands the definition of qualified real property to include the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning equipment; fire protection and alarm systems; and security systems.
A look back — and forward
In nearly every year since 2001, businesses have been able to immediately deduct a percentage of the cost of eligible property during the first year it is placed in service — with the remaining cost deducted using regular depreciation methods, the Sec. 179 deduction, or a combination of regular depreciation and the Sec. 179 deduction.
This became known as “bonus depreciation.” It was designed as a tax incentive to help stimulate the economy as well as provide tax relief for small to midsize businesses in need of equipment. Although the bonus depreciation deduction expired between 2005 and 2007, it returned in 2008. Percentages have ranged from 30% to 100% over the years, but the deduction hasn’t been at 100% since the 2011 tax year.
After the Protecting Americans from Tax Hikes (PATH) Act was passed in late 2015, the bonus depreciation deduction, which at the time was 50%, was on the road to being phased out yet again. The percentage under the PATH Act was scheduled to decrease to 40% in 2018 and 30% in 2019 before disappearing (with certain exceptions) completely in 2020. The TCJA, however, breathes new life into the deduction, ensuring it will remain for several more years.
Under the new law, 100% bonus depreciation is available for assets placed in service after September 27, 2017, and before January 1, 2023. Then bonus depreciation is scheduled to be reduced as follows:
- 80% for property placed in service in 2023,
- 60% for property placed in service in 2024,
- 40% for property placed in service in 2025, and
- 20% for property placed in service in 2026.
For certain assets with longer production periods, the above dates are delayed by one year. For example, 100% bonus depreciation applies to long-production-period property placed in service in 2023 and is reduced to 80% for such property placed in service in 2024.
Claiming depreciation deductions can get complicated — especially with the recent tax law changes. To reap the full benefits, contact your CPA to discuss your construction company’s 2018 capital improvement purchase plans, as well as plans for future years.
We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfenden at (302) 254-8240.