The Tax Cuts and Jobs Act (TCJA) increased the benefits of both Bonus Depreciation and 179 expensing. While this is a good thing it also has created some confusion. In recent weeks we have fielded many calls from experienced CPAs and professionals asking about the difference between 179 and Bonus. It is critical to understand the difference between 179 and Bonus in order to maximize deductions.
Under the TCJA 179 Expensing was increased to $1 million and starts phasing out at $2.5 million. Additionally 179 was expanded to include Qualified Improvement Property (QIP), Roof Replacements, HVAC Replacements, Fire Protection Systems, and Alarm Systems, when installed into non-residential property. At the same time the TCJA increased Bonus Depreciation to 100% for 5-years, and allowed Bonus to be taken on used property, if certain requirements are met. However, due to a drafting error Bonus does not currently include QIP.
While 179 and Bonus look similar on the surface there are some fundamental differences. Under 179 an item is expensed, while bonus is an acceleration of the recovery period. This is an important fundamental difference. Because of this difference 179 is taken before depreciation, including bonus depreciation, is calculated. Due to the amount of items eligible for 179 this is important to consider. Since QIP, Roofs, HVAC, and other systems are included, it will be common for taxpayers to hit the $2.5 million phase out amount during large renovations.
Even though 179 covers more items than bonus (QIP, Roofs, HVAC are not bonus eligible), there are limitations to 179 that businesses need to consider. First of all the property must be held for a use in a “trade or business” and not simply for the production of income. In Publication 946 the IRS states that “investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify”. This severely limits certain real estate investors from taking 179, where that limitation does not apply to Bonus Depreciation. Additionally 179 is limited to a taxpayer’s business income, and passive income is not eligible. This means that 179 cannot be utilized to create or increase losses.
That said 179 can be more flexible at times. The biggest flexibility is the ability to take 179 on a property-by-property basis. This means a taxpayer can pick and choose which assets they are going to 179 to expense. Bonus on the other hand can only be elected into on a category by category basis, for example all 5-year property. For taxpayers trying to do advanced tax planning 179 provides greater flexibility.
Car dealerships are also finding 179 as a saving grace under the new tax law. Under the TCJA taxpayers that take a deduction for Floor Plan Interest, are not eligible for bonus depreciation on any assets. This means that many car dealerships are limited in taking bonus depreciation under the TCJA. However the same restrictions do not apply for 179 expensing. A car dealer that goes through a renovation may be able to expense some of the items under 179, while they would have restrictions under the new Bonus Regulations.
Due to the overlap of 179 and Bonus it is important for CPA’s and Taxpayers to discuss the differences. By understanding the differences taxplanning can be much more effective. Please feel free to reach out to us if you would like to discuss further or if you have any questions about this confusing area of tax law.