Businesses can now write off most depreciable business assets in the year those assets are placed in service—a significant tax break but one that still requires attention to be used effectively.
Final versions of long-proposed regulations from the Treasury and the IRS apply to assets that typically have a depreciable recovery period of 20 years or less, such as machinery, equipment, computers and furniture.
“Essentially this is allowing the asset to be expensed in a full year, rather than being written off over time as it depreciates. This allows for a rather large and front-ended reduction in taxable income,” said Jamie Hopkins, director of retirement research at Carson Group in Philadelphia.
“These regulations were issued mostly in response to comments regarding previously issued regulations,” said Craig Richards, director of tax services at Fiduciary Trust International in New York, adding that additional guidance is still coming.
The Treasury and the IRS plan to issue guidance for taxpayers to opt to apply the final regulations in prior taxable years or to rely on the proposed regulations issued a year ago.
Still, “it’s definitely a positive for many businesses in the short run, allowing perhaps less tax to be paid today to [then] reinvest or grow revenue,” Hopkins said. “This falls in line with much of what Tax Cut and Jobs Act took aim at, boosting the short-term economic value of businesses by reducing taxes.”
Regarding some non-residential building improvements, the TCJA originally required, mistakenly, that such “qualified improvement property” be depreciated over 39 years instead of 15 years, “which meant they were also ineligible for bonus depreciation,” said Nate Smith, Clearwater, Fla.-based director in the CBIZ MHM national tax office. And earlier this year the Coronavirus Aid, Relief, and Economic Security (CARES) Act corrected this for qualified improvement property placed in service on or after January 1, 2018, among other changes.
“Since 100% of the cost of qualifying property is eligible, this translates into the potential for an immediate tax write-off of those assets” for both direct owners and indirect owners (perhaps through partnership interests) of qualifying property, said Michael Torhan, tax partner in the New York office of EisnerAmper’s real estate services group.
“For our clients, the withdrawal of the pass-through, look-through rule is particularly welcome,” added Michael Greenwald, CPA, partner and business entity tax practice leader in the New York office of Friedman LLP. On the other hand, he added, qualified improvement property (QIP) acquired as part of a non-residential purchase and placed in service previously by the seller is ineligible for bonus depreciation.
“This is a material change that was not in the proposed regulations and, therefore, there was no opportunity for review and comment,” he said.
The new regs revoke requirements that a partner “look through” to clarify possible previous ownership of affected property, Smith said, adding that wealthy clients who invest in real estate businesses can benefit from cost-segregation studies when their businesses acquire existing buildings.
Implementation of the regulations can be very complicated in certain situations, said Robbin E. Caruso, CPA and partner at Prager Metis in Cranbury, N.J. “Failure to make elections timely and properly, address changes in accounting methods or apply the regulations accurately could cause a business owner a lot of unnecessary grief should their return come under examination,” she said. “Addressing corrections for depreciation related to QIP may require amending returns, including special elections or ... a change in accounting method.”
Care is needed when considering other implications of bonus depreciation. “For example, many states de-couple from the federal bonus depreciation provisions [so] state taxable income may be higher than federal taxable income for certain taxpayers,” Torhan said.
Electing the Section 163(j) business-interest expense limitation can affect bonus depreciation for some property, as can certain pandemic-related business relief, tax experts said.