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The Tax Cuts and Jobs Act (the Act) that Congress passed in December will provide significant tax savings for most businesses. Increased bonus and Section 179 depreciation deductions are among the changes that real estate owners and investors will benefit from.
Section 179 is an election made on the item-by-item basis for qualifying property that allows to expense certain property in the year placed in service. The Act increases the current expensing limit of $510,000 to $1 million, phase out starts at $2.5 million.
The Act expands the definition of Section 179 property to include certain lodging-related depreciable tangible personal property, such as furniture and appliances for hotels, apartment buildings, and student housing. Also expanded is the definition of qualified real property eligible for Section 179 expensing which now includes a range of improvements to nonresidential real property, such as security systems, fire protection and alarm systems, roofs, and HVAC systems.
The Act eliminates depreciation categories for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property and replaces them with Qualified Improvement Property (QIP). QIP placed in service after 2017 is now depreciated over 39 years. The House and Senate Conference Committee report identified QIP as 15-year Modified Accelerated Cost Recovery System (MACRS) property, however, the language in the Act law did not provide for QIP as 15-year MACRS property. We believe Congress will have to make a technical correction to the Internal Revenue Code to correct this oversight.
QIP means any improvement to the interior portion of commercial real estate. QIP does not include enlargement of the building, any elevator or escalator or the internal structural framework of the building.
Land improvements generally do not qualify for Section 179 deductions. Land improvements are items such as parking lots, swimming pools and bridges.
Business income limitation
Another financial limitation on businesses claiming Section 179 deductions is that the business cannot claim more in one year than its net taxable business income in that year. For example, if your business has a net loss for a given year, you cannot take a Section 179 deduction. If your net taxable income is less than the total amount of deductions you wish to make, you can claim only deductions that do not exceed your income. However, you have the option of carrying over costs into the next year that could not be deducted in the current one.
Another tax incentive offered by the Act is increased bonus depreciation. Under the prior law, there was a 50 percent bonus depreciation for property placed in service in 2017. Under the new law, there is 100 percent bonus depreciation for property placed in service after September 27, 2017, and before 2023, 80 percent for 2023, 60 percent for 2024, 40 percent for 2025 and 20 percent for 2026. Qualified property includes property acquired by purchase if a taxpayer has not previously used the property, so the property does not have to be new, if it is not acquired from a related party and was not leased by the taxpayer before acquiring. Bonus depreciation is not available for property with recovery period over 20 years. QIP placed in service on or before December 31, 2017 still is under the 15-Year MACRS life and would qualify for bonus depreciation.
For California purposes, the maximum Section 179 expense deduction is $25,000, with phase-out starting at $200,000. California does not allow bonus depreciation.
To further discuss how you can take advantage of the new depreciation provisions, please contact your RINA representative.