Tax Law and News Depreciation and Like-Kind Exchange Planning Read the Article Open Share Drawer Share this:Click to share on Twitter (Opens in new window)Click to share on Facebook (Opens in new window)Click to share on LinkedIn (Opens in new window) Written by Steve Eubanks, EA, NTPI Fellow Modified Jul 23, 2020 4 min read The Tax Cuts and Jobs Act (TCJA) brought about changes in Sec. 179, bonus depreciation and like-kind exchanges for your clients. Let’s recap these tax changes that apply to tax year 2018 and beyond. Sec. 179 – Depreciation For 2018, the additional first year depreciation [bonus or Sec. 168(k)] is 100 percent of the cost. Sec. 179 has limits of $1 million maximum total with a phase-out limit of assets eligible for Sec. 179 starting at $2.5 million. The Sec. 179 limit on a sports utility vehicle (SUV) remains at $25,000. For 2019, you still can take 100 percent bonus depreciation, while Sec. 179 limits increased to $1.02 million for maximum total and $2.55 million for beginning of the phase out. The Sec. 179 limit for a SUV increases to $25,500. A significant TCJA change for depreciation and Sec. 179 is to allow certain used property to be eligible. The TCJA defines qualified property as the original use, which begins with the taxpayer or the acquisition of which by the taxpayer, that meets the acquisition requirements of Sec. 168(k)(2)(E)(ii). The original use definition stays the same as before the TCJA: Any new property used for the first time in a trade or business, such as when a business owner goes to a supplier to purchase a new tractor that has never then used. Under the new TCJA acquisition requirements, used property can now qualify for bonus depreciation and Sec. 179 due to the expanded definition from the TCJA as long as the following factors apply: The taxpayer or its predecessor didn’t use the property at any time before acquiring it. The taxpayer didn’t acquire the property from a related party. The taxpayer didn’t 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. The cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion). Tax planning with depreciation is an important aspect in helping your clients make the right decisions of choosing between taking bonus depreciation or Sec. 179 on an asset. Keep in mind that for 3-, 5-, 7- and 10-year class assets, you can take Sec. 179 on a portion of the asset; on the remaining basis, you can take bonus depreciation. Here is a chart to help you plan: Sec. 179 Bonus Depreciation Limited amount Yes $1 million (2018) $1.02 million (2019) No Investment income Yes $2.5 million (2018) $2.55 million (2019) No Generates a net operating loss No Yes Allowed for investment property No Yes Building use requirement Must be >50% No minimum percentage Subject to recapture Yes No New and used property Yes Yes 3- 5-, 7- and 10-year class property Yes Yes 15- or 20-year class property No Yes Nonresidential qualified improvement property (39 year) Yes No Alternate depreciation system property Yes No Like-Kind Exchanges Effective 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property and intangible business assets generally do not qualify for like-kind exchanges; only real property qualifies. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building, or city property for a ranch or farm, or commercial building for vacant lots. However, for like-kind exchange planning with your clients, you need to know that real property in the United States does not qualify for a like-kind exchange of real property outside our borders. The purpose of like-kind exchanges is to defer any gains into the future. The future can also mean continuously making like-kind exchanges for other properties in order to keep deferring those gains for decades, including the depreciation recapture portion (Sec. 1250). The eventual sale of the property would then trigger the ordinary gain from the depreciation recapture and the remaining as a capital gain. The ordinary gain would be tax at the ordinary income tax rates, while the capital gains would be at the maximum of 20 percent. Tax planning is essential under the TCJA when determining whether to use bonus depreciation versus Sec. 179 on newly acquired assets, and like-kind exchanges with real property. As a tax professional, you can use your knowledge of these asset acquisition factors to properly advise clients on making the right decisions. Editor’s note: Learn about three depreciation perks for your clients in this article from Mike D’Avolio, CPA, JD. Previous Post What Taxpayers Need to Know When Disaster Strikes Next Post How to Help Your Small Business Clients Stay on Top… Written by Steve Eubanks, EA, NTPI Fellow Steve Eubanks, EA, NTPI Fellow, is a Senior Tax Analyst Programmer with Intuit® for more than 33 years. Steve has been an Enrolled Agent since 1987 and has a Master of Business Administration in finance. He has extensive experience with individual, corporate, and non-profit tax compliance. He is an active member of the National Association of Enrolled Agents and the Texas Society of Enrolled Agents. More from Steve Eubanks, EA, NTPI Fellow Comments are closed. Browse Related Articles Tax Law and News 3 Key Depreciation Perks Clients Need to Know Tax Law and News Depreciation changes for 2023 Tax Law and News Advice for Business Clients Closing Out Tax Year 2019 Tax Law and News Used Property Qualifies for Bonus Depreciation Tax Law and News Tax Tips for Small Businesses Tax Law and News Year-End Extender Legislation Still in Holding Pattern Tax Law and News Deducting the Standard Mileage Rate vs. Actual Expenses… Tax Law and News Changes to the Business Interest Deduction Tax Law and News Tax Reform 101 for Self-Employed Tax Law and News 5 important tax provisions in the CARES Act