New Tax Law to Benefit Small Business Owners

Although first-year bonus depreciation is nothing new, the Tax Cuts and Jobs Act (TCJA) has allotted for more generous bonus depreciation rules. Though temporary, these rules allow for small business owners to cash in on various benefits.

Qualifications for Bonus Depreciation

In order for a company to be eligible for bonus depreciation, an asset must generally meet one of the following descriptions:

  1. Assets with a depreciation period of 20 years or less;
  2. Most computer software; or
  3. Real estate qualified improvement property placed in service after 2017

Qualifying Real Estate

Real estate that qualifies for improvement property includes any improvement to an interior portion of a commercial building so long as the improvement occurs after the building was first in service. This does not include property with improvements that are attributable to:

  1. Enlargement of the building;
  2. Any elevator or escalator; or
  3. The internal structural framework of the building.

When it comes to real estate qualified improvement property that was placed in service after 2017, the Tax Cuts and Jobs Act was supposed to have permanently installed a depreciation period of 15 years. However, due to an oversight, qualified improvement property was not added to the list of property that includes a 15-year depreciation period. Instead, qualified improvement property is currently subject to a 39-year depreciation period.

Heavy Vehicle Bonus Depreciation

The TCJA allows for 100% bonus depreciation of qualifying used property that was acquired and placed in service sometime between Sept. 28, 2017 and Dec. 31, 2022. For heavy vehicles that are used over 50% of the time for business purposes, this can be a big tax break. For example, if you purchase a $70,000 heavy SUV in 2018 and use it 100% of the time for business, you can deduct the entire $70,000 in 2018. A “heavy” vehicle includes one that has a gross vehicle weight rating of 6,000 pounds or more. Bonus depreciation is not available when you lease.

Passenger Vehicle Depreciation

For cars and light trucks that were acquired and placed in service sometime after Dec. 31, 2017 and used at least 50% of the time for business endeavors, the TCJA permanently increases the luxury auto-depreciation limitations. The TCJA will increase the maximum first-year luxury auto depreciation allowance by $8,000 if the passenger vehicle is acquired and placed into service sometime between Jan. 1, 2018 and Dec. 31, 2026.

New Luxury Auto Depreciation

For vehicles that cost at least $58,000, an individual may claim an $18,000 first-year luxury auto depreciation limit for 2018. This amount includes the extra $8,000 bonus depreciation.) For those vehicles, which don’t apply, they are subject to the IRS’s table for five-year property.

What Does This Mean?

The great thing about these new depreciation limits for vehicles that are acquired and placed in service between Sept. 28, 2017 and Dec. 31, 2022, is that the TCJA installs 100% first-year bonus depreciation. This law also increases the depreciation limits for luxury auto passenger vehicles that have been placed in service sometime after 2017.

Contact a Fairfax County Business Law Attorney

If you are in need of further clarification on how the new tax laws will affect your small business, contact an experienced business law attorney for clarification.

Posted in: Business Law