First-year bonus depreciation has been around for a few years, but the Tax Cuts and Jobs Act (TCJA) installed much more generous (but temporary) bonus depreciation rules. Here’s what small business owners need to know to cash in on the new deal before it’s too late.
Bonus depreciation basics under the TCJA
For qualified assets acquired and placed in service between 9/28/17 and 12/31/22, the TCJA increases the first-year bonus depreciation percentage to 100% (up from the 50% rate that applied for most of 2017). Even better, the 100% deduction is allowed for both new and used qualified assets. Under prior law, bonus depreciation was only allowed for new stuff.
Qualified assets for bonus depreciation
To be eligible for bonus depreciation under the current rules, an asset generally must meet one of the following descriptions: (1) assets with a depreciation period of 20 years or less, (2) most computer software, (3) real estate qualified improvement property placed in service after 2017 (subject to fixing the glitch explained immediately below).
Glitch regarding bonus depreciation for real estate quality improvement property
Real estate qualified improvement property means any improvement to an interior portion of a non-residential building if the improvement is placed in service after the building was placed in service. But qualified improvement property does not include any improvement for which the expenditure is attributable to: (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.
For real estate qualified improvement property placed in service after 2017, the TCJA was supposed to permanently install a 15-year depreciation period — which would make such property eligible for bonus depreciation in years when bonus depreciation is allowed (like 2018). However due to a legislative oversight, qualified improvement property was not added to the list of property with a 15-year depreciation period. Therefore, until this glitch is fixed, qualified improvement property is subject to a 39-year depreciation period (as under prior law), and its eligibility for bonus depreciation is negated. Thankfully, the intended 15-year depreciation period for qualified improvement property (and the related eligibility for bonus depreciation) is reflected in the Conference Committee’s explanation of Congressional intent for the TCJA changes. So I hope and trust that the glitch will be retroactively fixed in upcoming technical corrections legislation. Fingers crossed!
100% first-year bonus depreciation for heavy SUVs, pickups, and vans used over 50% for business
The TCJA allows 100% first-year bonus depreciation for qualifying new and used property that is acquired and placed in service between 9/28/17 and 12/31/22. This break can have a hugely beneficial impact on first-year depreciation deductions for heavy vehicles used over 50% for business.
You buy a new $70,000 heavy SUV (or heavy pickup or van) in 2018 and use it 100% for business. Thanks to the 100% first-year bonus depreciation break, you can deduct the entire $70,000 cost in 2018.
Variation: You buy a used $40,000 heavy SUV (or heavy pickup or van) in 2018 and use it 100% for business. Thanks to the 100% first-year bonus depreciation break, you can deduct the entire $40,000 cost in 2018 — because 100% bonus depreciation is allowed for both new and used heavy vehicles that are acquired and placed in service in 2018. Nice!
Heavy vehicle definition
Bonus depreciation is only available when you buy (not lease) an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. Examples of suitably heavy vehicles include the Chevy Tahoe, Ford Explorer, Toyota Sequoia, and lots of full-size pickups. You can usually verify a vehicle’s GVWR by checking the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. Don’t expect dealer sales personnel to know which vehicles have GVWRs above 6,000 pounds. Check for yourself!
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Bonus depreciation for passenger vehicles (not heavy vehicles) used over 50% for business
For both new and used passenger vehicles (meaning cars, light trucks, and light vans) that are acquired and placed in service after 12/31/17 and used over 50% for business, the TCJA permanently increases the so-called luxury auto depreciation limitations that apply to these vehicles.
And if you claim bonus depreciation for a new or used passenger vehicle that is acquired and placed in service between 1/1/18 and 12/31/26, the TCJA increases the maximum first-year luxury auto depreciation allowance by $8,000.
For vehicles that are acquired and placed in service 2018, the maximum luxury auto deductions are as follows.
• $18,000 for Year 1 if bonus deprecation is claimed.
• $16,000 for Year 2.
• $9,600 for Year 3.
• $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.
These allowances assume 100% business use. They will be adjusted for inflation in post-2018 years.
New luxury auto depreciation limits only apply to relatively expensive passenger vehicles
The $18,000 first-year luxury auto depreciation limit for 2018 (including the extra $8,000 for bonus depreciation) only applies to vehicles that cost $58,000 or more. That’s because the luxury auto depreciation limits are based on the following percentages from the applicable IRS depreciation table.
||Percent of depreciable cost
|4 and 5
You buy a $58,000 car in 2018, use it 100% for business, and claim $8,000 of first-year bonus depreciation. The luxury auto depreciation limits do not apply, because the car does not cost over $58,000. Instead you calculate the annual depreciation deductions using the MACRS table for five-year property. The depreciation calculations are as follows.
||Depreciation calculation from IRS table
||$8,000 + (20% x $50,000) = $18,000
||32% x $50,000 = $16,000
||19.2% x $50,000 = $ 9,600
||11.52% x $50,000 = $ 5,760
||11.52% x $50,000 = $ 5,760
||5.76% x $50,000 = $ 2,880
You buy a $70,000 car in 2018, use it 100% for business, and claim $8,000 of first-year bonus depreciation. The luxury auto depreciation limits apply, and the annual allowances are as follows.
||Luxury Auto Limitation
|4 and beyond
||$5,760 until fully depreciated
You get the idea. For passenger vehicles acquired and placed in service in 2018, the luxury auto depreciation limits only apply to vehicles that cost more than $58,000 if $8,000 of bonus depreciation is claimed. Vehicles that cost less are depreciated using the IRS table for five-year property. In other words, the TCJA luxury auto depreciation limits only apply to passenger vehicles that could accurately be described as luxury vehicles.
Prior-law luxury auto limits were much skimpier
For 2017, the prior-law luxury auto depreciation limits were $11,160 for Year 1 for a new car with $8,000 of bonus depreciation or $3,160 for a used car with no bonus depreciation, $5,100 for Year 2, $3,050 for Year 3, and $1,875 for Year 4 and thereafter. Slightly higher limits applied to light trucks and light vans. These limits applied to vehicles that cost around $16,000, and no sane person would describe a $16,000 vehicle as a luxury ride.
The bottom line
The TCJA installs 100% first-year bonus depreciation — generally for new and used qualified property (including heavy vehicles) acquired and placed in service between 9/28/17 and 12/31/22. Wow!
The new law also permanently increases the luxury auto depreciation limits for passenger vehicles (cars, light trucks, and light vans) that are placed in service after 2017.