On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. Within the legislation, there are a number of provisions that could have a significant impact on taxpayers with tangible property.
Key Provisions
These are the tax reform provisions that could have the greatest effect on those with tangible property.
Bonus Depreciation
Bonus depreciation is increased to 100% for property acquired and placed in service after September 27, 2017, and before January 1, 2023—plus an additional year for longer production period property and certain aircraft.
The 100% bonus depreciation will be phased down by 20% per calendar in taxable years beginning January 1, 2023, reducing to 0% by January 1, 2027.
Eligibility
- Bonus depreciation applies to new and used property, and must be acquired in an arm’s-length transaction. There are other limitations related to trade-ins, like-kind exchanges, and involuntary conversions as well.
- Qualified film, television, and live theatrical productions are also eligible for bonus depreciation.
- Property used in the business of furnishing or selling electrical energy, water, sewage disposal, gas, or steam isn’t eligible for bonus depreciation.
- Qualified improvement property (QIP) no longer qualifies for bonus depreciation. QIP is discussed further below.
- Property used in businesses that have had floor plan financing indebtedness may not be eligible if they are subject to the business interest limitation in Section 163(j).
Section 179
The expensing limit for Section 179 was doubled to $1 million and the expensing phaseout threshold was increased to $2.5 million for taxable years beginning after 2017.
Other Changes
- The definition of Section 179 property is expanded to include personal property used predominantly to furnish lodging as well as improvements to nonresidential real property—after the property was first placed in service. This includes improvements such as: roofs, HVAC systems, fire protection and alarm systems, and security systems.
- Annual depreciation limitations for listed property (Section 280F), generally referred to as the luxury automobile provisions, are increased as follows: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
- Section 179 expensing amounts as well as the $25,000 sport utility vehicle limitation and the luxury automobile limitations are indexed for inflation for taxable years beginning after 2018.
Cost Recovery Periods
The cost recovery periods for several types of property are reduced under the new tax law. These are the most notable and are effective for property placed in service after December 31, 2017.
Recovery Period Reductions
- The separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property were eliminated—all of which were previously 15-year property. The conference agreement indicated that they were all to be replaced by QIP, however, in an apparent oversight, the Internal Revenue Code modifications to change the life for QIP to 15 years from 39 years, weren’t included in the final draft. Because of this, QIP remains 39-year property and doesn’t qualify for bonus depreciation.
- The alternative depreciation system (ADS) recovery period for residential rental property was reduced to 30 years from 40. The conference agreement indicates the ADS life for QIP was to be reduced to 20 years as well; however, this change also wasn’t included in the final edits to the statute.
- Real property trades or businesses that elect out of the limitation on the deduction for interest under Section 163(j) must use ADS lives to depreciate any of their nonresidential real property, residential rental property, and qualified improvement property.
- Farming machinery and equipment used in a farming business is five-year property, rather than seven-year property.
Like-Kind Exchanges
Section 1031 like-kind exchanges will be limited to real property not held primarily for sale. The provision applies to exchanges completed after December 31, 2017. However, exceptions are provided for if the taxpayer disposes of the exchange property or receives the exchange property prior to December 31, 2017.
Tax-Saving Opportunities
Given the lower tax rates for 2018 and beyond, it’s important for taxpayers with tangible property to review depreciation records for any and all opportunities to increase depreciation deductions or expenses through reclassification in their 2017 returns. Increased deductions for 2017 reduce taxable income at 2017 tax rates, creating a permanent tax difference and locking in savings. For individuals, the tax rate difference can be as much as 10%. Corporations were granted a 14% rate reduction—assuming a corporate rate of 35%.
For assets placed in-service prior to 2017, many of the results can be implemented through an automatic accounting method change on a Form 3115. Here are some tax-planning strategies that can increase deductions in 2017 through an automatic method change.
Cost Segregation
This is a tax deferral strategy that frontloads depreciation deductions into the early years of real estate ownership, whether you are building, remodeling, expanding, or purchasing a facility. Segregating the cost components of a building into the proper asset classifications and recovery periods for federal and state income tax purposes results in significantly shorter tax lives—five, seven, and 15 years—rather than the standard 27.5- or 39-year depreciation periods. These accelerated tax lives allow taxpayers to increase deductions and reduce their federal and state income tax liability during the early years of ownership.
Fixed Asset Consulting
Many taxpayers dedicate a tremendous amount of resources to manage their fixed assets, yet they often still find that their books aren’t in order and assets aren’t being properly classified. This can put a company at a significant compliance risk—and lead to missed tax advantages and reduced cash flow.
A review of depreciation schedules is designed to reduce federal and state tax liabilities by applying tax laws to a company’s fixed assets. Besides the standard tax depreciation lives in Revenue Procedure 87–56, taxpayers often miss other beneficial accelerated depreciation methods and lives, including qualified property—such as qualified leasehold improvement property, qualified improvement property, qualified retail improvement property, and qualified restaurant property, where available—bonus depreciation, and asset retirements, or ghost assets.
Immediate tax deferrals can result from accelerating deductions on assets that were previously placed in service with improper tax lives or methods.
Tangible Property Regulations
While the latest tangible property regulations became effective in 2014 and many companies performed some analysis to determine their impact, tax planning opportunities remain. Taxpayers may still be able to use some of the look-back opportunities, including over-capitalized repair expenditures.
Partial dispositions, which generally occur when a business undergoes an improvement project, will need to be identified and included in the taxpayer’s return during the tax year in which the disposal occurs.
Section 179D
Although the tax deductions for energy efficient buildings in Section 179D expired as of December 31, 2016, there is still an opportunity to benefit from the tax law on a look-back basis. This provision grants a tax deduction of up to $1.80 per square foot for certain energy efficient property, including interior lighting, HVAC systems, and building envelopes. The benefits can be used by owners and tenants of commercial properties that constructed leasehold improvements after 2006.
Next Steps
The new tax law didn’t include everything lawmakers wanted. For provisions not included in the legislation, extensions have been proposed.
The Tax Extender Act of 2017 bill was introduced December 20, 2017, and would retroactively extend many tax credits and deductions that expired at the end of 2016, making them available to taxpayers for the 2017 and 2018 tax years.
Action will need to be taken on the bill prior to the start of filing season, January 23, 2018, in order for any of the extended provisions to be available for the 2017 tax year.
Proposed Retroactive Extensions
- Renewable energy property credit, such as small wind turbines and geothermal heat pumps—Sections 45 and 48
- Carbon capture sequestration credit—Section 45Q
- Energy efficient buildings deduction—Section 179D
- Extension of the special rule relating to qualified timber gains—Section 1201
- Residential energy property credit—Section 25D
- Energy efficient new homes credit—Section 45L
We’re Here to Help
For more information on how the new tax law could affect you and your business, contact your Moss Adams professional or email creditsandincentives@mossadams.com. You can also visit our tangible asset incentive services page and our dedicated tax reform page to learn more.