The Modified Accelerated Cost Recovery System (MACRS) is required for most tangible depreciable property placed in service after the year ending December 31, 1986, unless certain specific exceptions apply. The useful lives under MACRS include 3, 5, 7, 10, 15, 20, 27.5, 31.5, and 39 years, depending on the type of property.
Due to the Tax Cuts and Jobs Act of 2017 (TCJA), enhanced bonus depreciation deductions are available for qualifying MACRS property placed in service before January 1, 2027. The original use of the qualifying property must begin with the taxpayer, unless acquired by purchase and placed in service after September 27, 2017. See below for further explanation. The previous bonus depreciation deduction rates were 30, 40, and 50% and have been increased to 100% through 2022, gradually reducing to 0% in 2027.
The bonus rates are as follows for property:
|Acquired before Sept. 27, 2017 and placed in service before 2018||50%|
|Acquired before Sept. 27, 2017 and placed in service during 2018||40%|
|Acquired before Sept. 27, 2017 and placed in service before 2019||30%|
The enhanced bonus rates are as follows for property acquired and placed in service during:
|After September 27, 2017 through 2022||100%|
|2027 and forward||0%|
The deduction is claimed on the cost of the property after any Code Section 179 reductions. Regular MACRS deductions are computed on the cost reduced by both bonus depreciation and Section 179. There is no taxable income limit on the amount of bonus depreciation deduction available, unlike the Section 179 expense and there is also no maximum or threshold amount that can be taken in any given tax year.
The following property qualifies for bonus depreciation:
- Property which is depreciable under MACRS and has a recovery period of 20 years or less
- Qualified improvement property placed in service after 2015 and before 2018
- Qualified leasehold improvement property placed in service before 2016
- MACRS water utility property
- Computer software depreciable over 3 years under Code Section 167(f)
- A qualified film, television show, or theatrical production placed in service after September 27, 2017, if it qualifies for Code Section 181 expense election
Types of property that do not qualify includes, but is not limited to:
- Other types of intangible property
- Property that must be depreciated using the Alternative Depreciation System (ADS)
- Listed property with 50% or less business use
There are special rules that apply to used property that qualifies for bonus depreciation, along with the requirements listed above. The taxpayer or prior owner must not have used the property at any time before acquiring it and the taxpayer must “purchase” the property within the meaning of Code Section 179(d)(2). Property is considered previously used by a taxpayer or prior owner if the taxpayer or prior owner previously had a depreciable interest in the property.
Taxpayers can also choose to elect a 50% bonus depreciation deduction instead of 100% for all qualified property placed in service during the taxpayer’s first year that includes September 27, 2017. This election will apply to all depreciable property placed in service during the tax year and is not made separately for each property class.
The bonus depreciation deduction applies to federal returns, and the state income tax treatment may not exactly follow the federal deduction. All of these considerations require careful analysis and we recommend discussing the different options available to you with a CPA or tax professional. Please contact us with any questions you may have.
By Elyse McMillen, CPA