The historic tax code update passed in December of 2017—The Tax Cuts and Jobs Act (TCJA)—included a variety of changes impacting businesses. Among the items was an extension and modification of the deduction for depreciable business assets. Read on to learn more about this new write-off and how business taxpayers can use it to their advantage.
Specifics of the 100% Depreciation Deduction
The TCJA changed the allowable first-year bonus depreciation deduction for qualified property. Formerly 50%, the deduction was increased to 100% through 2022; after that, the amount of allowable bonus depreciation phases out over four years, as follows:
Which assets qualify for the deduction? There are four requirements that assets must meet:
- Assets must be of a specified type (generally, this includes machinery, equipment, computers, appliances, and furniture);
- Assets must either (a) be new or (b) be used and meet the acquisition requirements of Sec. 168(k)(2)(E)(ii);
- Assets must have a recovery period that is less than or equal to 20 years; and
- Assets must have been acquired and placed in service after September 27, 2017.
Impact of the 100% Depreciation Deduction on Vehicles
For a passenger vehicle that satisfies the other requirements for qualified property and for which the taxpayer does not decline bonus depreciation, the TCJA extended the $8,000 increase in the otherwise applicable first-year depreciation limit.
The new law’s 100% first-year bonus depreciation can have a huge beneficial impact on first-year depreciation deductions for new and used heavy vehicles that are utilized more than 50% for business purposes. Heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment rather than passenger vehicles, qualifying them for the 100% first-year bonus depreciation.
How to Claim the Deduction (Or Not)
To claim the deduction, business taxpayers should file Form 4562, Depreciation and Amortization with their business tax return. It is important that taxpayers retain copies of their filed 4562’s in order to keep track of prior deductions and ensure that they claim the appropriate deduction on future tax returns.
To opt out of the depreciation deductions for a class of property, taxpayers should do so on their tax return. Taxpayers who have already filed a return without making the election to opt out have six months from the original filing deadline to submit an amended return.
Be sure to contact your WNDE tax advisor for additional guidance on the 100% depreciation deduction.