2017 Tax Act. Cost Recovery (Depreciation and Expensing)

Transcription

1 2017 Tax Act Cost Recovery (Depreciation and Expensing) 1

2 Cost Recovery, Generally Under 263, 263A, and general tax principles, a taxpayer generally must capitalize the acquisition and production costs of property (and is not permitted a current deduction for such costs) Section 167(a) generally permits a taxpayer a depreciation deduction for wear and tear for property used in a trade or business or held for the production of income Generally, 168 ( MACRS ) prescribes depreciation deductions permitted However, certain Code provisions (including 168(k), 179, 280F, discussed herein) may accelerate or limit cost recovery 2

3 Cost Recovery, Generally Section 179 permits a taxpayer elect to treat [certain] costs... as an expense which is not chargeable to capital account ; that is, take an immediate deduction, as if such costs were not costs required to be capitalized Sections 167 and 168 (including accelerated deprecation under 168(k)) permit depreciable deductions (rather than expensing ) This distinction may matter for purposes of computing unadjusted basis for 199A purposes; costs expensed under 179 may be considered to never have been part of the original basis of such associated property 3

4 Expensing Depreciable Business Assets [ 179] ( 13101) Prior Law Section 179 provides that a taxpayer may elect to expense the cost of section 179 property rather than recover such cost through depreciation Section 179 property is generally property that is purchased for use in the active conduct of a trade or business (emphasis added) that is either (i) depreciable tangible personal property that is subject to recapture under 1245 or (ii) off-the-shelf computer software. Section 179(d)(1). 4

5 Expensing Depreciable Business Assets [ 179] ( 13101) Prior Law (cont.) Section 179 property specifically excludes air conditioning and heating units, and any property described in 50(b) (i.e., certain property not eligible for investment tax credit). Section 179(d)(1) [flush]. Taxpayer may elect to include qualified real property as section 179 property. Qualified real property includes qualified leasehold improvements property ( 168(e)(6)), qualified restaurant property ( 168(e)(7)) and qualified retail improvement property ( 168(e)(8)). Section 179(f). 5

6 Expensing Depreciable Business Assets [ 179] ( 13101) Prior Law (cont.) Limitations 1. The maximum amount a taxpayer may expense is $500, (b)(1) 2. Phase-out: The $500,000 allowable expensing is reduced by the amount by which the cost of the qualifying property exceeds $2,000, (b)(2) The $500,000 and $2,000,000 amounts are adjusted for inflation since (b)(6) 3. Amounts eligible to be expensed may not exceed the taxable income for such taxable year that is derived from the active conduct of a trade or business. 179(b)(3)(A) Amounts disallowed as a deduction may be carried forward to succeeding taxable years. 179(b)(3)(B) 6

7 Expensing Depreciable Business Assets [ 179] ( 13101) New Law Effective for properties placed in service in taxable years beginning after Dec. 31, 2017: 1. Maximum amount that may be expensed is increased to $1,000, (b)(1) 2. The phase out begins at $2,500,000, indexed for inflation beginning for taxable years after Dec. 31, (b)(2) and (3) 7

8 Expensing Depreciable Business Assets [ 179] ( 13101) New Law (cont.) 3. Expands the definition of section 179 property to include certain tangible personal property relating to furnishing lodging as defined in 50(b)(2) (e.g., beds, refrigerators, ranges. See (h)). 179(d)(1)(B) 4. Expands the definition of qualified real property under section 179 to include the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs, HVAC, fire protection and alarm systems, security systems. 179(f). 8

9 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Prior Law Section 168 generally provides the depreciation deduction permitted with respect to a piece of property Section 168(g) provides an alternative depreciation system ( ADS ) for certain property, that causes costs to be recovered over a longer period than is generally permitted under 168 9

10 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Prior Law (cont.) Section 168(k) permitted a taxpayer to deduct as additional depreciation up to 50% of the adjusted basis of qualified property in the year the property is placed in service if certain requirements are satisfied Per 168(k)(2)(D), property subject to ADS is not eligible for accelerated depreciation under 168(k) A corporation eligible for a 168(k) deduction with respect to a property may elect to claim additional AMT credits in lieu of the 168(k) deduction 10

11 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Prior Law (cont.) Qualified property is any the following properties subject to MACRS that the original use commences with the taxpayer and was placed in service prior to Jan. 1, 2020: Property that has a recovery period of 20 years or less Computer software as defined in 167(f)(1)(B) which is depreciable under 167(a) Property that is qualified utility property Property that is qualified leasehold improvement property Certain aircraft (if placed in service prior to Jan. 1, 2021) Certain property with longer production periods (if placed in service prior to Jan. 1, 2021) 11

12 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Prior Law (cont.) If the property is manufactured, constructed, produced by the taxpayer, the activity must begin prior to 1/1/20. Section 168(k)(2)(E)(i). For certain aircraft and properties with longer production periods only the portion of basis attributable to costs incurred before 1/1/20 is eligible for the additional depreciation. Section 168(k)(2)(B)(ii). 12

13 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Prior Law (cont.) Phase-Down: the 50% additional deduction is reduced based on the year the property was placed in service: Placed in Service Year Qualified Property in General % 50% % 50% % 40% Longer Production Period Property and Certain Aircraft 2020 none 30% [of basis attributable to pre-1/1/20 cost] 2021 none none 13

14 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) New Law Effective for taxable years beginning after Dec. 31, 2017: % deduction for property acquired after 9/27/17 and placed in service before 1/1/23 (1/1/24 for certain properties with longer production periods and certain aircraft). 168(k)(6) Transition rule for first taxable year ending after 9/27/17 that taxpayer may elect to apply a 50% deduction rather than 100%. 168(k)(10(A) The new law specifies that property will not be treated as acquired after the date a written binding contract is entered into (h)(1) [flush] 14

15 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) New Law (cont.) 2. Retains the old law phase-down rules for property acquired before Sept. 28, (k)(8) 3. The 100% deduction is phased down by 20% per calendar year beginning after 2022 (2023 for certain properties with longer production periods and certain aircraft). 168(k)(6) 15

16 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) Qualified Property Acquired Before 9/28/17 Qualified Property Acquired After 9/27/17 Placed in Service Year Qualified Property in General/Specified plants 9/28/17-12/31/17 50% 50% % 50% % 40% 2020 none 30% Longer Production Period Property and Certain Aircraft Placed in Service Year Qualified Property in General/Specified Plants 9/28/17-12/31/22 100% 100% % 100% % 80% % 60% % 40% 2027 none 20% Longer Production Period Property and Certain Aircraft none none none none 16

17 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) New Law (cont.) 4. Eliminates the requirement that the original use of the qualified property must commence with the taxpayer (i.e., used property is now deductible under 168(k)). 5. The definition of qualified property is expanded to include certain qualified film, television, and live theatrical productions (as defined in 181(d) and (e)) that is placed in service after 9/27/17 and before 1/1/ (k)(2)(H) 6. The definition of qualified property specifically excludes property primarily used in a trade or business ( 168(k)(d)(9)): i. of furnishing/selling certain public utilities ii. that has had floor plan financing indebtedness unless not a tax shelter prohibited from using cash method and is exempt from the 163(j) interest limitation rules by satisfying the 448(c) gross receipts 17

18 Temporary 100% Depreciation Deductions for Certain Business Assets [ 168(k)] ( 13201) 7. The special rule with respect to long term contracts under the percentage of completion MOA is extended for property placed in service before 1/1/27 (or 1/1/28 for property with a longer production period) 8. In connection with the elimination of the corporate AMT, the statute removes the option for a taxpayer to take an AMT credit in lieu of the 163(k) deduction 18

19 Depreciation Limitations on Luxury Automobiles and Personal Use Property [ 280F] ( 13202) Prior Law Section 280F(a) generally limits the annual cost recovery deduction for certain passenger automobiles Passenger automobile is broadly defined to include any fourwheeled vehicles that are manufactured primarily for public streets, roads, and highways and are under a certain gross vehicle weight. Section 280F(d)(5). Section 280F(b) generally limits the annual cost recovery deduction for property used partially in a business and partially for personal use. 19

20 Depreciation Limitations on Luxury Automobiles and Personal Use Property [ 280F] ( 13202) Prior Law (cont.) Maximum amount of deduction: If placed in service in 2017 (assuming no 168(k) deduction is claimed) the maximum deduction is $3,160 in 2017, $5,100 in 2018, $3,050 in 2019 and $1,876 for 2020 and beyond. The limitation is indexed for inflation. 280F(a)(1)(A) Passenger automobiles subject to 280F are eligible for 179 expensing only to the extent of the limitation provided in 280F. Section 280F(d)(1). The 280F limitation is increased by $8,000 for a taxpayer entitled to additional depreciation under 168(k) but the increase is reduced by $1,600 per calendar year beginning in This is not indexed for inflation. Section 168(k)(2)(F). 20

21 Depreciation Limitations on Luxury Automobiles and Personal Use Property [ 280F] ( 13202) Prior Law (cont.) Section 280F(d)(4) provides special rules and requirements (e.g. substantiation) in the case of certain listed property. Listed property includes: Any passenger automobile Any other property used as a means of transportation (excluding cars used for car service business and the like) Any property of a type generally used for entertainment, recreation, amusement Any computer or peripheral equipment (except if owned/leased by a taxpayer and used exclusively at a regular business establishment of such taxpayer) 21

22 Depreciation Limitations on Luxury Automobiles and Personal Use Property [ 280F] ( 13202) New Law Effective for property placed in service after Jan. 31, 2017: 1. Maximum amount of allowable depreciation increased to $10,000 for the year the property is placed in service, $16,000 for the second year, $9,6000 for third year, and $5,760 for every year after. Such amounts are adjusted for inflation 2. The 280F limitation is still only increased by $8,000 if taxpayer eligible for additional depreciation under 168(k) 3. Computer or peripheral equipment is removed from the definition of listed property 22

23 Applicable Recovery Period for Real Property [ 168] ( 13204) Prior Law Section 168(e)(3)(E) included in the definition of 15-year property, among other things, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property (the effect being depreciation was accelerated for those items) Section 168(k)(2)(A)(i)(IV) permitted additional depreciation for qualified improvement property, a term referring to certain nonresidential interior improvements that is generally broader than and inclusive of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property (with certain exclusions)

24 Applicable Recovery Period for Real Property [ 168] ( 13204) New Law The terms qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property have been replaced with qualified improvement property (as formerly defined in 168(k)(3)) However, under 168(g)(1)(F) and (8), nonresidential real property, residential rental property, and qualified improvement property of a an electing real property trade or business (under 163(j)(7)(B)) is now subject to ADS and not eligible for accelerated depreciation under 168(k) (other property of such an electing trade or business is eligible)

25 Applicable Recovery Period for Real Property [ 168] ( 13204) New Law Drafting Errors Notwithstanding the legislative intent, two drafting errors were made with respect to qualified improvement property. Until technical corrections are made: year property does not include qualified improvement property (meaning that such property must be depreciated as it otherwise would) 2. Accelerated depreciation under 168(k) is not available for qualified improvement property [Note that, even without the drafting error, this would be true for electing real property trades or businesses]