Guest Blogger: Dr. Victoria Hansen, Associate Professor of Accounting, Cameron School of Business
While we are all excited for the new tax law changes coming in 2018, we first have to file 2017 tax returns - and there are only a few days left to do so!
As always, tax provisions have been adjusted for inflation for 2017. In addition, while most of the changes to the Internal Revenue Code (IRC) from the Tax Cuts and Jobs Act of 2017 (TCJA) are effective starting in 2018, some provisions impact 2017 returns.
Depreciation is always a big deduction for most businesses. For 2017, the immediate expensing provisions under IRC Section 179 have been adjusted for inflation. Businesses can elect to immediately expense and deduct up to $510,000 of qualified business property placed in service during the tax year.
The maximum allowable deduction of $510,000 is reduced $1 for $1 for businesses with purchases of qualified business property over $2,030,000. The $510,000 deduction is fully phased out with purchases of $2.54 million.
Bonus depreciation is also available for 2017 tax returns, although the rules have been slightly changed from last year. For qualified property purchased before Sept. 28, 2017 the bonus depreciation rules allow for the deduction of 50 percent of the cost of qualified business property. For assets purchased after Sept. 27, 2017, the TCJA provides an increased bonus deduction of 100 percent of the cost of qualified business property.
Bonus depreciation can be taken after the Section 179 deduction is maximized. However, taxpayers can elect bonus depreciation even if they do not elect to take a Section 179 deduction.
Qualified business property is tangible property depreciated under MACRS [Modified Accelerated Cost Recovery System] with a recovery period of 20 years or less, and computer software defined in and depreciated under IRC Section 167(f)(1).
Both new and used property qualify under Section 179. However, bonus depreciation applies only new property. Qualified business property must be placed in service before Dec. 31, 2017.
The TCJA also eliminates the deduction of some previously deductible expenses effective in 2017. Local lobbying expenses paid or incurred after Dec. 21, 2017 are no longer deductible. Local lobbying expenses include amounts paid for lobbying efforts with respect to legislation before a local government body (including Indian tribal governments).
Also, effective Dec. 21, 2017, a deduction will be generally disallowed for penalties paid to or at the direction of the government or specified nongovernmental unit with respect to a violation or potential violation of any law.
Finally, 2017 is the final year that the Section 199 manufacturers’ deduction will be available. This deduction has been repealed as part of the TCJA. The Section 199 manufacturers’ deduction allows qualifying manufactures engaged wholly or significantly in domestic production within the U.S. can qualify to reduce their tax bill.
Qualifying manufacturers include taxpayers who are engaged in:
- The manufacture, production, growth or extraction of tangible personal property
- The production of qualified film
- The production of electricity, natural gas or water
- The construction of real property
- The provision of architecture/engineering services
The above information relates to federal income taxes and may not be applicable for state income tax purposes. In fact, many states specifically do not follow federal tax depreciation rules. The deductions discussed above are subject to additional rules and limitations. Be sure to contact your tax professional before claiming any deductions to make sure you qualify.