The Tax Cuts and Jobs Act (TCJA), signed December 22, 2017, implemented significant changes related to depreciation deductions — resulting in both positive and not-so-positive outcomes for taxpayers. The IRS recently released information attempting to highlight the changes and clarify certain misconceptions.
 
It’s important to note that prior to the TCJA, the most recent act to affect depreciation was the Protecting American from Tax Hikes Act of 2015 (PATH Act). The TCJA supplemented some items in the PATH Act and completely replaced others. Below we start by taking a look at the special depreciation provisions under the PATH Act, which will help illustrate the magnitude and impact of the newest changes under the TCJA. 

Prior Special Depreciation Rules Under the PATH Act

Bonus Depreciation

• Taxpayers were eligible to claim a 50% bonus depreciation deduction on eligible assets.
• Bonus depreciation was permissible on any asset with a depreciable life of 20 years or less, or was included in an asset classification that specifically permitted bonus depreciation (see Special Asset Classifications below).
• Only new assets qualified for bonus depreciation. 

Special Asset Classifications
Qualified Leasehold Improvements

• Qualified leasehold improvements included improvements made to the interior of nonresidential real property, provided those improvements were pursuant to a lease and met various other limitations.
• Assets included in this classification decreased their depreciable life from 39 years to 15 years and were eligible for bonus depreciation. 

Qualified Retail Property

• Qualified retail property included improvements to the interior of nonresidential real property, provided the improved area was open to the general public, used in a retail trade or business, and met various other limitations.
• Assets included in this classification decreased their depreciable life from 39 years to 15 years and were eligible for bonus depreciation. 

Qualified Restaurant Property

• Qualified restaurant property included any building or improvement to a building, provided that 50% or more of the buildings square footage was devoted to the preparation of and seating for on-site meals.
• Assets included in this classification decreased their depreciable life from 39 years to 15 years; however, they were ineligible for bonus depreciation. 

Qualified Improvement Property

• Qualified improvement property included improvements made to the interior of nonresidential real property, provided the improvements were made after the underlying building was placed in service.
• Assets included in this classification retained a 39-year depreciable life; however, they were eligible for bonus depreciation. 

Section 179 Expensing

• Certain qualified assets were allowed to be expensed at 100%, provided that the taxpayer both exceeded a taxable income limitation and did not exceed an asset acquisition limitation.
• To qualify for Section 179 expensing, property needed to be tangible, depreciable and classified as personal property.
• The limitation of Section 179 expense in 2017 was $510,000. 

New Special Depreciation Rules Under the TCJA

Bonus Depreciation

• Bonus depreciation has increased from 50% to 100% for assets placed in service after September 27, 2017. This limitation will be decreased by 20% per year beginning January 1, 2023.
• Qualified assets still must have a depreciable life of 20 years or less.
• Both new and used assets now qualify for bonus depreciation. 

Important note:  When reviewing an individual asset’s “placed-in-service" date, it is important to consider the written binding contract rule. This rule states that if a written binding contract to acquire an asset is in place, the date of that contract dictates which set of rules to apply, rather than the placed-in-service date. The process of tracking two separate dates and determining which rules are applicable can be burdensome, and situations that require special analysis should be discussed with your tax advisor. 

Special Asset Classifications
Qualified Leasehold Improvements

• This asset classification was removed, effective for tax years after December 31, 2017. 

Qualified Retail Property

• This asset classification was removed, effective for tax years after December 31, 2017. 

Qualified Restaurant Property

• This asset classification was removed, effective for tax years after December 31, 2017. 

Qualified Improvement Property

• This asset classification remains in place, and eligible property mirrors property eligible for this classification under the PATH Act.
• Review of various committee reports implies that the intention of the legislation was to provide this asset classification with a 15-year depreciable life, which would allow bonus depreciation. However, as the TCJA is currently written, this property would receive a 39-year depreciable life and would not be eligible for bonus depreciation. We believe a technical correction or revision is necessary to allow for a shorter depreciable life and for bonus depreciation. As of the date of this post, a technical correction on this issue is not imminent. We will monitor the situation going forward. 

Important note:  The cutoff placed-in-service date for an asset to qualify under any of the removed special asset classifications is December 31, 2017, and not September 27, 2017. 

Section 179 Expensing

• The taxable income limitation and asset acquisition limitation are still in place, although the asset acquisition limitation has been increased.
• In addition to tangible and depreciable personal property, specific improvements to existing nonresidential real property are now also eligible. These include qualified improvement property; heating, ventilation and cooling (HVAC); fire suppression and alarms security systems.
• The limitation of Section 179 expense in 2018 is increased to $1 million.
• These changes are in effect for tax years beginning after December 31, 2017. 

Opportunities and Analysis

The updated special depreciation provisions in the TCJA provide some substantial beneficial treatments, but also removes some prior advantageous treatments for taxpayers. This post and the accompanying chart can be used as a quick reference guide to the new rules. Re-classification of assets, application dates related to these changes and overall planning strategy should be discussed with your tax advisory team to help ensure you maximize the benefits available under the new rules. 
 
Contact Kim Palmer at kpalmer@cohencpa.com or a member of your service team for further discussion.
  
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.