The New Bonus Depreciation Deduction

Continuing on with my examination of the new tax act, I am going to examine the purported meat of the “jobs” portion of this act.  Beginning 9/27/17 (that’s right, assets purchased as of a very odd date at the 3nd of the third quarter) you can deduct 100% of the purchase price for certain qualifying assets.

But, this is one of those temporary tax deals.

Placed in Service before % Deductible
1/1/2023 100
1/1/2024 80
1/1/2025 60
1/1/2026 40
1/1/2027 20

It get better, I think.  the new code appears to also allow for the purchase of used property.  The code section they added says, ”

c) APPLICATION TO USED PROPERTY.—
(1) IN GENERAL.—Section 168(k)(2)(A)(ii) is amended to read
as follows:
‘‘(ii) the original use of which begins with the
taxpayer or the acquisition of which by the taxpayer
meets the requirements of clause (ii) of subparagraph
(E), and’’.
(2) ACQUISITION REQUIREMENTS.—Section 168(k)(2)(E)(ii) is
amended to read as follows:
‘‘(ii) ACQUISITION REQUIREMENTS.—An acquisition
of property meets the requirements of this clause if—
‘‘(I) such property was not used by the taxpayer
at any time prior to such acquisition, and
‘‘(II) the acquisition of such property meets
the requirements of paragraphs (2)(A), (2)(B),
(2)(C), and (3) of section 179(d).’’

To interpret legaleze, the “original use” means new property.  Under the old code, what you had to buy in order to qualify was new, under the premise that new stuff creates jobs.

The new tax law adds a new clause, “such property was not USED by the taxpayer at any time prior to such acquisition…”  Again, to interpret, whatever you buy will qualify as long as you didn’t already use it before buying it.  Think converting a leased car.  You were using it and then decide to “buy” the car.  This would not qualify as you already used it.  It doesn’t stop you, however, from buying someone else’s leased vehicle and then claiming the bonus depreciation.

Ok, I am with you, used equipment doesn’t generate jobs.  But it does allow a business the option now of spending 30-40% less by buying pre-owned and still getting the 100% write off.

What is interesting is the new tax law provides taxpayers the option to elect out of the bonus depreciation.  I will admit that under the old rules, where we had graduated corporate tax rates, I often suggested that C Corporations elect out because the item was taxed at less than 25% and we were pretty certain that the next years tax rate was going to be 35%.  But now, it is a flat 21% so there are no brackets to maximize.

The election is no doubt for Schedule C businesses and possibly pass-through entities since they are still subject to the graduated tax brackets.  I have to analyze a few scenarios to see if the election is worthwhile though.

And try to find the hidden gem that is no doubt lurking in one of the “by extension” paragraphs.  These call to the other code sections to ensure their references are updated and possibly one of these has another limit I haven’t caught yet.  Stranger things have happened.

Naturally, please don’t take this as tax planning advice and whatever you do, don’t rush out and buy stuff without talking with your tax professional.  If you like, I am happy to discuss your situation and help you decide if taking the 100% bonus depreciation is worthwhile if you are not currently working with a professional.  Feel free to contact me if you have any questions about this or any other aspect of the new tax law.

Have a great day.

 

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