Buying equipment or machinery is now twice as lucrative for the construction and real estate development industries, thanks to tax reform provisions related to fixed asset planning. Enhancements to two popular business tax strategies – bonus depreciation and Section 179 expensing – offer a limited opportunity for owners to reap more savings from asset purchases.
Let’s take a look at how these two strategies may positively impact the capital expenditure strategies of builders and developers. Keep in mind, this post deals with changes at the federal level only, so be sure to discuss state tax implications with your advisor.
Take Twice the Depreciation on Capital Expenditures
Before tax reform, businesses could deduct half of their expenditures on personal property and land improvements. Tax reform doubles this benefit and expands eligibility through December 31, 2022.
For qualified property acquired and placed into service after September 27, 2017, business owners may take 100 percent bonus depreciation. This doubled rate reduces by 20 percent annually after 2023. In addition to doubling the rate, tax reform also expands eligibility for bonus depreciation to used property in addition to the previously included brand new assets.
Beyond planning future capital expenses, business owners should also revisit previous purchases dating back to September 27, 2017 to take advantage of bonus depreciation opportunities on past asset purchases.
Expense Higher Amount of Purchase Price
Another popular asset-related tax strategy boosted by tax reform is the Section 179 Small Business Asset Expensing Election. This election lets owners immediately expense the full purchase price of eligible software, equipment and leasehold improvements, rather than capitalizing them and waiting for depreciation.
Post-tax reform, small business asset expensing is even more attractive for business owners. Starting on January 1, 2018, the Section 179 limit increased from $520,000 to $1 million. The new tax law also raised the phase-out threshold from $2.07 million to $2.5 million. Businesses that exceed this phase-out will see their expensing amount reduced dollar-for-dollar.
Tax reform also broadens eligibility to previously excluded structural components like roofs, HVAC equipment and fire protection, alarm or security systems.
Discuss Fixed Asset Planning with Business Advisor
Tax reform unlocks a number of new considerations and ideas for fixed asset purchases, including multi-year tax planning and the role of assets during mergers and acquisitions. All of these tactics require strategic advance planning, so make sure to discuss all tax and business implications for capital expenditures with your RKL advisor
Additionally, Pennsylvania and other states are currently grappling with how to absorb the impact of these federal depreciation changes, so RKL’s State and Local Tax team is monitoring these developments and will share updates as they unfold.
For more of RKL’s tax reform insights, visit our resource center at rklcpa.com/taxreform.