I always get a lot of questions this time of year about Depreciation. Here are the updates for this tax season…
TCJA 2017 Expansion of Section 179 Rapid Depreciation Rules
The Section 179 Limit is $1,220,000 with a spending cap of $3,050,000. Bonus depreciation is allowed this year. The definition of qualified real property eligible for rapid depreciation has been expanded to include interior improvements to nonresidential real property including:
Roofs
Heating
HVAC
Fire, Alarm, and Security Systems
Residential Tangible Property to furnish lodging
This expansion doesn’t include anything that expands any interior spaces. If you build out interior square footage, then the old depreciation rules are still in place.
Why is this significant?
Prior to this, in real estate we always asked whether it was a repair or a replacement. Repairs could be fully expensed in the year incurred, while replacement that increased the value of real estate had to be capitalized and depreciated over either a 27.5 or 39 year period.
But there were a couple of cases that went through the tax court system where landlords argued that replacing a roof on their commercial property didn’t increase the value of the property. In fact, if they hadn’t replaced the roof, then given the leaks that would have occurred, the value of the properties would have gone down.
The courts agreed with them, which is why we can now rapid depreciate replacement items on properties like roofs and HVAC increasing your deductions and reducing your tax liabilities.
Increase in Annual Depreciation Limits for Passenger Automobiles
Effective for vehicles placed in service after 12/31/2023, the annual depreciation limits for passenger automobiles are as follows…
Tax Bonus Depreciation With Bonus
Year not Claimed Depreciation
1 $12,200 $20,400
The following year’s limits are the same, whether bonus depreciation is claimed or not.
2 $19,800
3 $11,900
4-8 $7,160
New Like Kind Exchange Rules
The property types allowed in a Like Kind Exchange have changed. Under the new law, allowable property includes…
Improved and Unimproved Real Estate
Urban Lots and Rural Tracts
Commercial Property and Residential Rental or Investment Property
A Leasehold or similar property interest with at least 30 years left to run and real estate
Ineligible Property now includes:
Foreign Real Estate
Stock in trade or inventory property held primarily for sale
Generally Stocks, Bonds or Notes
Other Securities of evidences of indebtedness or interest
Partnership Interests
Certificates of Trust or Beneficial Interest
If you’re in the business of buying and flipping residential real estate, you can no longer include these parcels in a Like Kind Exchange
Let me leave you with this…
Years ago, when I was a younger tax accountant and people would ask me how they could save money on their taxes, I would tell them to go buy something. If you buy a new car or another piece of equipment, then we can get a tax deduction.
But over the years that message has changed. Please allow me to explain.
If you’re paying an average federal and state income tax rate of 30%, then why would you spend a dollar to save 30 cents? Wouldn’t it be better to not spend the dollar, pay the 30 cents in taxes, and be able to put the remaining 70 cents in your retirement account?
Young tax accountants are always afraid of bringing a large tax liability to their clients. It just isn’t a good time on a Saturday Night.
But sometimes it can be the best thing for the long-term health of that family.
My advice over the years has changed. Now my first question will always be whether or not you need to buy something for the business like a vehicle or a new machine.
If the answer is yes, then let’s be as economical as we can with the purchase and complete it before the end of the year. At that point, I can do the magic on the tax returns with depreciation.
But if that client isn’t planning on buying something, then spending the money just to be spending it doesn’t make a lot of sense. And if it doesn’t make sense, it certainly won’t make dollars.
Also, please realize that how we depreciate an item is an election. We have a conscious choice to make in many instances and can increase the deduction, if we want to reduce our taxes.
But if we know that we’re going to be walking into a bank in the next year to ask for money, then we’ll need to show more income. In this instance, the “Slow Boat To China” types of depreciation will help by reducing deductions. We’ll pay more in tax, but we’ll also have a better chance of getting a loan approved.
This is the eighth column in my series of getting my clients ready for their December Tax Planning Sessions. If you have questions, please don’t hesitate to ask.
One last thing.
Whether your candidates won or lost last night, let’s come together. We should strive not to be red or blue in the coming months.
We should all want to be purple.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
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