Generally, the two biggest deductions that can reduce a client’s taxable income are the Code Sec. 179 expense deduction and the 100 percent bonus depreciation deduction. And, as a result of TCJA, bonus depreciation can now be taken on used property as well as new property. It’s important to remember that bonus depreciation rules apply unless a taxpayer specifically elects out of those rules. A business may want to elect out of bonus depreciation if the business expects a tax loss for the year and the bonus depreciation would just increase that loss. By not taking bonus depreciation in the current year, a business can defer depreciation deductions into future years where it expects to have taxable income that can be offset by the depreciation deductions. Of course, where the business is operated through a flow-through entity, additional considerations must be given to the tax situation of the owner of the flow-through entity and whether the owner can benefit from the flow-through of the bonus depreciation deductions.
Since the Code Sec. 179 expense deduction can’t reduce taxable income, this is a better option for clients with taxable income. This year, the maximum Code Sec. 179 expense deduction is $1,020,000. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during the year exceeds $2,550,000.
If a client is looking for business-related property to purchase in order to reap the maximum benefit of the Code Sec. 179 expense deduction and/or the bonus depreciation deduction, a vehicle purchase could result in a substantial tax savings. By purchasing a sport utility vehicle weighing more than 6,000 pounds, a client can obtain a bigger deduction than if a smaller vehicle is purchased. Because vehicles that weigh 6,000 pounds or less are considered listed property, deductions are limited to $18,100 for cars, trucks and vans acquired and placed in service in 2019. However, if the vehicle weighs more than 6,000 pounds, up to $25,500 of the cost of the vehicle can be immediately expensed.
In October, the IRS issued final and proposed bonus depreciation regulations which clarify the implementation of the bonus depreciations rules. Under the proposed regulations, upon which taxpayers may rely immediately, a de minimis rule provides that a taxpayer is not deemed to have had a prior depreciable interest in a property – and thus that property is eligible for bonus depreciation in the taxpayer’s hands – if the taxpayer previously disposed of that property within 90 days of the date on which that property was placed in service. In addition, the proposed rules provide for an election that taxpayers may make to treat certain components of self-constructed property as eligible for bonus depreciation.