A new acronym and a law change. The Tax Cuts and Jobs Act (TCJA) was signed into federal law in 2017 and became effective January 1, 2018. The TCJA contained the most extensive federal tax law changes in more than 30 years in order to create important benefits for businesses including changes to the treatment of depreciation deductions.
What is Depreciation?
Assets in every business lose value over time. This decreasing value is accounted for as depreciation and the accounting for it can be complicated. Depreciation is reflected in the declining market value of an asset due to normal wear and tear over its useful life. In accounting terms, this value decline is recorded and used to recover the acquisition cost of the asset through business deductions. Depreciation is also used to reduce the business’s tax burden.
The General Benefits of Business Deductions
Most business expenses are treated as tax-deductible (or tax-reducing) expenses in the year the expenditure is made. Depreciation, however, is something that you can claim a deduction for in the current year, even though you did not spend money on it during that year. Depreciating assets simply gives you more income on your P&L statement. Careful tax planning will help you best handle business deductions to achieve the most favorable tax benefit. Consult your tax professional to help you navigate these complicated but beneficial waters, so you don’t make any mistakes that will cause IRS difficulties.
How Does the TCJA Impact Your Business?
There are two specific changes to the tax law that involve business deductions in beneficial ways:
- The law increases the Section 179 deduction. The cost of a new or used (qualifying) business property put into service during a year can now be deducted in the current year up to a certain limit. And, the amount of the maximum limit was doubled to $1 million. It also expands the deduction to include certain improvements to non-residential properties such as roofing and HVAC. As well, some depreciable software expenses are included.
- The law increases bonus depreciation. Qualified property that is placed in service after September 27, 2017 through 2022 can receive a 100% bonus depreciation for the cost of both new and used property.
Additional features of the TCJA are:
- Reduced C-Corp tax rate.
- The Corporate alternate minimum tax was eliminated.
- The new law increased the limitation on the cash method of accounting.
- Entities can now carry forward (but not back) a Net Operating Loss.
- Certain business deductions for entertainment are eliminated.
- The law limits in-kind exchanges.
- The law adds a limit on business interest deductions.
Seek Professional Advice for Your Tax and Business Finance Needs
Don’t travel the difficult waters of tax planning on your own. Seek the advice and assistance of Estess CPAs, based out of New Orleans, LA. We provide expert monthly accounting services, with comprehensive tax planning and preparation to help your small business succeed.