-An update on current tax reform from our Financial Services Department
The Tax Cuts and
Jobs Act (TCJA) modified several categories of depreciation. What follows is a
list of the most significant changes. While the act provides taxpayers
increased latitude in regards to depreciation and direct expensing (writing off
a current year equipment/machinery purchase i.e. tractor), it requires that
taxpayers recognize gain/income when trading certain previously
depreciated property (“pay back” depreciation previously taken on the traded
equipment/machinery). The TCJA giveth and it taketh away.
Like-Kind
Exchanges – Historically, the
exchange of depreciable real and personal property of a like-kind class did not
result in recognition of gain or loss provided both pieces of property were “held
for use in a trade or business”. The TCJA limits like-kind exchanges to real
property and as such, exchanges of personal property (machinery etc.) no longer
qualify for non-recognition of gain or loss. Essentially, trade-ins of equipment and other personal property will be
treated as sales and result in a taxable event.
Cars and Listed
Property – Passenger
automobile depreciation limits have increased significantly and may be
increased further through the use of bonus depreciation. Computers are no
longer required to be treated as listed property and as a result no longer
subject to the listed property rules that may limit depreciation benefits.
(MACRS) Modified
Accelerated Cost Recovery System – The MACRS
recovery period for farm machinery and equipment has changed from 7-years to
5-years (excluding grain bins, fencing, or other land improvement) and the 200%
depreciation method of MACRS made available when previously farmers had been
limited to the 150% MACRS method.
Bonus
Depreciation – Bonus
depreciation has increased from 50% to 100% (“full expensing”) and has been expanded
to include both new and used property of qualifying recovery periods. A
word of caution, many states do not recognize (disallow) bonus depreciation and
excessive use of such a tool may result in unexpected state tax liabilities.
Section 179 Expensing – Pre-inflation adjustments for Section 179
limits have been increased to $1 million on expensing and the phase-down
threshold increased to $2.5 million annually.
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