Accelerating depreciation can provide large tax savings for restaurants and retailers following the Tax Cuts and Jobs Act (TCJA). Bonus depreciation and the Section 179 deduction allow taxpayers to take accelerated depreciation on certain assets, which can be a great tax planning opportunity to take advantage of. Below we dive into the details of bonus depreciation and Section 179, what type of property qualifies and any restrictions.
Bonus Depreciation
Under the TCJA, 100% depreciation is allowed for certain assets purchased between September 28, 2017 and December 31, 2022. Unlike Section 179, bonus depreciation can be used to generate a taxable loss. Taxpayers are not required to take bonus depreciation, and an election out of bonus depreciation can be a useful tax planning tool in the right circumstances.
Qualifying Property
To be eligible, property must be tangible personal property depreciated under the Modified Accelerated Cost Recovery System (MACRS) method with a recovery period of 20 years or less. This includes new or used property such as:
- Restaurant furniture
- Restaurant equipment
- Land improvements
With some exceptions, Qualified Improvement Property (QIP) consists of improvements made to the interior of a restaurant that occurs after the building has already been placed into service.
Restrictions
QIP generally does not include restaurant buildings or improvements to the exterior of restaurant buildings. Under tax reform, QIP was not designated as either 15-year property nor as eligible for bonus depreciation. Currently, QIP does not qualify for bonus depreciation because it does not have a recovery period of 20 years or less. Until technical corrections are issued, QIP should be depreciated over 39 years or could be eligible for the Section 179 deduction.
Section 179
The Section 179 deduction is another useful tax planning tool that allows restaurants to take the total amount of depreciation of an asset in one year. Under tax reform, the maximum amount a taxpayer can expense increased to $1,000,000 with a phase-out limitation of $2,500,000.
Qualifying Property
Qualified real property now includes QIP and certain improvements such as:
- Alarm systems
- Fire protection
- Roofs
- HVACs
As we addressed above, only certain items are considered QIP, and the eligibility of such property should be evaluated before electing to take the Section 179 deduction.
In many cases, a restaurant or retailer should be eligible for either bonus depreciation or Section 179 on fixed asset purchases. Contact an Anders advisor with questions on how bonus depreciation and Section 179 can be used to your benefit.
