Cost Recovery Provisions

Cost Recovery Provisions in Final Tax Reform Bill

The final version of the tax reform bill, which was passed by Congress on December 20 and signed into law by Pres. Trump on December 22, makes a variety of changes to the cost recovery provisions in the Internal Revenue Code (IRC). The following table lays out the enacted provisions pertaining to cost recovery:

 

Cost  Recovery Provisions in
Final Tax Reform Bill

 

Current Law

Tax Bill

Increased Expensing for Qualifying Property

An additional
first-year depreciation deduction (known as bonus depreciation) is allowed
for 50% of the adjusted basis of qualified property acquired and placed into
service in 2017; the 50% allowance is phased down for 2018 and 2019 to 40%
and 30%, respectively, and drops to 0% in 2020 (phasing out of 50% deduction
is delayed one year for property with a longer production period and certain
aircraft); taxpayers can elect to accelerate Alternative Minimum Tax (AMT) credits
in lieu of bonus depreciation

100% expensing will be
available for property placed into service between 9/27/17 and 1/1/23; the
increased expensing phases down 20% each year starting in 2023 and drops to
0% for 2027 and beyond (phase out is delayed one year for property with a
longer production period and certain aircraft); in conjunction with repeal of
corporate AMT, the election to accelerate corporate AMT credits in lieu of
bonus depreciation is eliminated; current bonus depreciation rules continue
to apply to property acquired before 9/28/17

Applicability of Increased Expensing to Used Property

To qualify for bonus
depreciation the “original use” of the property had to begin with the
taxpayer

Qualifying property can
include used property purchased in arm’s-length transactions, not received as
gift or from a dividend, and not received in a reorganization and, in the
case of a trade-in, applies only to any money paid in addition to the
exchange

Applicability of Increased Expensing to Real Estate

Qualifying property
does not include real property

Remains the same except
any property utilized by real property trade or business opting out of
interest provision cannot qualify

Public Utility Exception to Increased Expensing

Public utility property
can be qualifying property

Increased expensing
provision does not apply to public utility property predominately used in the
trade or business of furnishing or sale of (1) electrical energy, water, and
sewage disposal services, (2) gas or steam through a local distribution
system, or (3) transportation of gas or steam by pipeline, if the rates for
such furnishing or sale are established for approved by a State (or political
subdivision thereof) or the Federal Government.

Modification of treatment of certain farm property

Tangible property
generally is depreciated under MACRS; property used in a farming business is
assigned various recovery periods in the same manner as other business property
in other types of businesses; any property (other than nonresidential real
property, residential rental property, and trees or vines bearing fruit or
nuts) used in a farming business is subject to the 150% declining balance
method

Shortens the recovery
period from 7 to 5 years for any machinery or equipment (other than any grain
bin, cotton ginning asset, fence, or other land improvements) used in a
farming business; repeals required use of 150% declining balance method for
property used in a farming business with the exception of 15-year or 20-year
property used in the farming business to which the straight line method does
not apply; farming businesses electing out of the interest limitation
provision must use Alternative Depreciation System (ADS) to depreciate any
property with a recovery period of 10 years or more

Section 179 Small Business Expensing

$500,000 of the cost of
qualifying property placed in service may be currently expensed; $500,000 is
reduced (but not below zero) by the amount by which the qualifying property
exceeds $2 million

Cap is increased to $1 million
with phase-out starting at $2.5 million

Change in Statutory Recovery Periods for Real Property

ADS recovery period is
40 years for nonresidential real property; qualified leasehold improvement
property, qualified restaurant property, and qualified retail improvement
property are in separate categories for depreciation purposes with different
recovery periods.

ADS recovery period for
nonresidential real property is lowered to 30 years; separate categories of
qualified leasehold improvement property, qualified restaurant property, and
qualified retail improvement property are combined into a catch-all category
known as qualified improvement property with a general 15-year recovery
period and 20-year ADS recovery period; real property trades or businesses
opting out of interest limitation provision must use ADS to depreciate any of
its nonresidential real property, residential rental property, and qualified
improvement property

Research and Experimental  Expenditures

Taxpayers may elect to
deduct currently the amount of certain reasonable research or experimental
expenditures paid or incurred with a trade or business; taxpayers may choose
to forgo a current deduction, capitalize their research expenditures, and
recover them ratably over the useful life of the research, but in no case
over a period of less than 60 months; taxpayers, alternatively, may elect to
amortize their research expenditures over a period of 10 years

Research and
experimental expenditures must be capitalized and amortized to expense ratably
over a 5-year period (15-year period for expenditures attributable to foreign
research) beginning with the midpoint of the taxable year in which such
expenditures are paid or incurred; effective after 12/31/2021

 

 

Cost Recovery Provisions

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas. https://www.linkedin.com/in/drquintana