Depreciation is something we think of at year end and the tax filing time. And the 2018 tax year holds some new expanded opportunities to maximize use of depreciation for income tax purposes earlier in an asset’s life. What are these changes? To understand this, let’s take a brief look at some basic depreciation concepts.
Depreciation is the allocation of an asset’s cost over its estimated useful life. The simplest form of depreciation is straight-line depreciation. To calculate straight-line depreciation, simply divide its cost by the estimated useful life. For example, a $7,000 asset with an estimated life of 7 years would be depreciated at $1,000 a year. There are also accelerated methods which provide more depreciation in earlier years than in later years of the estimated useful life. Depreciation used for tax purposes for most equipment is generally an accelerated method.
Assets purchased in 2018 are now eligible for increased amounts of accelerated tax depreciation for federal purposes. There are two general methods accepted by the IRS. One is called Modified Accelerated Cost Recovery System with the availability of Bonus Depreciation and an other is governed by code section 179. In addition, the IRS issues guidance on acceptable useful lives for assets depending upon what they are. Equipment generally has a 7 year life. Land improvements have useful lives of 15 years. Real property has lives ranging from 27.5 years to 39 years.
For the 2018 tax year, bonus depreciation is available at a 100% rate, meaning a qualifying asset may be written off in the year of acquisition. Luxury automobile limitations have also increased and first year depreciation can be as high as $18,000 utilizing bonus depreciation. A company may also “opt out” of using the bonus depreciation. The option to “opt out” of bonus depreciation has to be chosen for each group of assets that are determined to be of the same useful life.
Also increased for the 2018 tax year is the Section 179 limit. This limit was previously set at $500,000 maximum use as long as new asset additions did not exceed $2,000,000 for the year. The 2018 maximum limit is now $1,000,000 as long as new asset additions do not exceed $2,500,000. This form of immediate expensing is available to be used on most equipment and can be utilized on an individual asset or multiple assets as determined by the company.
In order to determine which depreciation method is best for your company, analysis of the company’s net income before depreciation, how long an asset is to be held, and various other factors effect which methodology is best for your company. Your state’s income taxes may or may not have similar changes. It just depends on the tax laws in the states in which you operate. A CPA experienced within your specific industry will assist you in making the best tax planning decisions for your company.
Let us at BUSBooks help you know what your depreciation options are, when it is good to accelerate depreciation, and when it is better not to accelerate it! Together we can maximize your deductions.
The next Nerd News will discuss Equipment Purchase Planning.
Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator
BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.