Section 179 and Bonus Depreciation Changes Under the Tax Cuts and Jobs Act

The new tax law includes some important tax breaks for small businesses.

Congress passed the Tax Cuts and Jobs Act which included the following important changes to Section 179 and bonus depreciation for small businesses.

Section 179 Limit Set at $1 Million

Section 179 expensing (named for Section 179 of the Internal Revenue Code) allows a business owner to deduct in one year the cost of new or used personal property used in business more than 50% of the time. The Section 179 deduction is subject to an annual dollar limit. The Section 179 limit has varied over the years and was set at $500,000 in 2015 under the Protecting Americans from Tax Hikes (PATH) Act.

Under the Tax Cuts and Jobs Act passed in December 2017, Congress has changed the annual limit to $1 million starting in tax year 2018. In addition, starting in 2018, a business owner may purchase up to $2.5 million in business property that qualifies for the Section 179 deduction each year. The deduction is phased out for those who purchase more than this amount. This limit had been $2 million under the PATH Act. The Section 179 limits will be indexed for inflation starting in 2019.

Bonus Depreciation Extended through 2027

Bonus depreciation allows a business owner to deduct a substantial amount of a new long-term asset’s cost in the first year, instead of depreciating the cost over many years. The bonus depreciation amount was set at 50% for 2015 through 2017 under the PATH Act. With 50% bonus depreciation, you could deduct 50% of the cost of an asset in the first year and the remainder over later years using regular depreciation. Bonus depreciation was scheduled to expire in 2020 after being phased down to 40% in 2018 and 30% in 2019.

The Tax Cuts and Jobs Act has increased first-year bonus depreciation to 100%. This goes into effect for long-term assets placed in service after September 27, 2017. In another significant change under the new tax law, you can use bonus depreciation for purchases of new or used property. Under prior law, you could only use bonus depreciation for new property.

The 100% bonus depreciation amount remains in effect until January 1, 2023. In later years, the first-year bonus depreciation deduction amount goes down, as follows:

  • 80% for property placed in service after December 31, 2022 and before January 1, 2024.
  • 60% for property placed in service after December 31, 2023 and before January 1, 2025.
  • 40% for property placed in service after December 31, 2024 and before January1, 2026.
  • 20% for property placed in service after December 31, 2025 and before January 1, 2027.

To qualify for bonus depreciation, property classified as “listed property” under the tax code must be used over 50% of the time for business. Under the Tax Cuts and Jobs Acts, computers will no longer be classified as listed property. Thus, bonus depreciation may be used to deduct computers used less than 50% of the time for business starting in 2018.

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