IRS Rules Change Regarding Expense and Depreciation Deductions

 Posted on January 31, 2019 in Small Business Taxes

Historically, business owners have been able to utilize tax deductions based on the cost of assets bought for business use and the depreciation of those assets. However, the recent Tax Cuts and Jobs Act (TCJA) modified the rules regarding the deduction of expenses under Section 179(a) and the deduction of depreciation under Section 168(g). These changes affect business taxes filed for years 2018 and beyond.

Section 179(a): Business Asset Deductions

This law permits businesses to deduct the purchase price of certain assets as an expense for the year the business begins to use the property. The recent updates to the law raised the maximum expense deduction to $1 million (up from $500,000). The updated law also raised the phase-out limit to $2.5 million (up from $2 million).

This deduction is available for tangible property like tools and technology used in business. The deduction is also available for qualified real property. Under the TCJA, qualified real property includes qualified improvement property, as well as certain types of improvements to nonresidential property, which includes: 

• Roofs 
• Heating, air conditioning, and ventilation
• Alarms and fire protection systems
• Security systems

Section 168(g): Depreciation of Assets

In addition, the TCJA widened the definition of which businesses are required to use the alternative depreciation system (ADS), which is defined in Section 163(j). A farming business may choose not to be bound by the limits for interest deduction in this Section. However, if it opts out of these limits, it is required to use the ADS for any property that has a recovery period of at least 10 years. 

Trades or businesses involving real property may also choose not to be bound by the limits for interest deduction in Section 163(j). When doing so, they are required to utilize the ADS for residential rental property, nonresidential property, and qualified improvement property. 

Call a San Jose, CA Business Tax Lawyer

Correct use of these deductions can be a huge help in reducing your overall business tax liability, provided they are calculated correctly. Due to the recent TCJA tax overhaul, it is critical that you receive legal help to understand if your business qualifies and how to use these deductions to your best advantage.

At the John D. Teter Law Offices, our skilled San Jose small business tax attorney has helped many taxpayers understand favorable tax provisions and how to use them. To learn more, call our office today at 408-866-1810.

Sources:

https://www.irs.gov/newsroom/irs-issues-guidance-on-section-179-expenses-and-section-168g-depreciation-under-tax-cuts-and-jobs-act