The 2017 Tax Cuts and Jobs Act of 2017 (TCJA) became effective as of January 1, 2018. Among its many modifications of the Internal Revenue Code is a temporary but highly beneficial change in the eyes of high-net worth individuals in the market for luxury items such as private aircraft or yachts as well as equipment leasing and finance companies – an increase and extension of bonus depreciation provided for under Section 168(k) of the Code. As explained further below, purchasers of eligible business property are able to make a first-year deduction of 100% of the purchase price for property acquired and placed in service after September 27, 2017 and before January 1, 2023.
Generally, depreciation allows a taxpayer to recover the cost of an eligible asset by spreading such cost over the course of its lifetime. Since 2001, Congress has been offering “bonus depreciation” – an accelerated method of depreciation in which a business is able to claim an additional first-year deduction – to encourage business owners to purchase “capital assets” (property expected to generate value over a long period of time). As tax reform has progressed over the past decade, the amount of bonus depreciation offered has changed several times. Immediately prior to the TCJA, businesses were only able to expense 50% of purchase price of an asset in the first year. Now, businesses can claim 100%.
The eligibility of assets for bonus depreciation has also expanded. Prior to the TCJA, the property purchased must have been new and had an asset lifetime of 20 years or less. According to guidance provided by the Internal Revenue Service, used property qualifies if the following are true:
- The taxpayer or its predecessor did not use the property at any time before acquiring it;
- The taxpayer did not acquire the property from a related party;
- The taxpayer did not acquire the property from a component member of a controlled group of corporations;
- The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor;
- The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent; and
- The cost of the used property eligible for bonus depreciation does not include the basis of property determined by reference to the basis of other property held at any time by the taxpayer.
The TCJA revised bonus depreciation in other ways as well, mostly irrelevant to high-net worth individuals and the equipment leasing and finance industry; however, of particular note to the industry are the following important points:
- Property primarily used in the trade or business of the sale or furnishing of the following, and for which rates thereof must be approved by a federal, state, or local government agency, is not eligible for bonus depreciation:
- electrical energy, water or sewage disposal services;
- gas or steam through a local distribution system; or
- transportation of gas or steam by pipeline.
- Certain types of equipment (particularly aircraft and farming equipment) are subject to special rules or have certain situational issues that can fog up their eligibility for bonus depreciation.
Overall, the bonus depreciation provisions of the TCJA are highly favorable to high-net worth individuals and the equipment leasing and finance industry. The time to take advantage of these provisions, however, is now. The available 100% bonus depreciation is set to shrink in 20% increments starting on January 1, 2023 (80% in 2023, 60% in 2024, and so on). If you are an individual looking to acquire a luxury capital asset or a business in the equipment leasing and finance space, it is best to act fast because 100% bonus depreciation will not last, and it cannot get any better than 100%!
IRS CIRCULAR 230 NOTICE: To ensure compliance with the requirements of IRS Circular 230, we inform you that any U.S. tax advice contained in this communication or attachment hereto is not intended or written to be used and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending any transaction or matter addressed in this communication or attachment.