Section 179 or 100% Bonus Depreciation

Section 179 or 100% Bonus Depreciation

Under the Tax Cuts and Jobs Act, bonus depreciation increased to 100%, and eligible property was expanded to include not only new property, but the acquisition of used property as well.   The amount of bonus depreciation that a taxpayer can claim is not limited to a maximum dollar amount, is not phased out if the taxpayer puts a certain amount of qualifying assets in place in that year, and is not limited to the taxpayer’s business income.

Section 179 expensing is limited to a maximum deduction of $1 million, the deduction is subject to phase out at $2.5 million, and the deduction is limited to the taxpayer’s business income.  Should taxpayers still utilize the Section 179 deduction with the option of 100% bonus depreciation?

The definition of qualifying property under Section 179 was expanded and now allows a corporate taxpayer to deduct certain improvements made to nonresidential real property after the date the real property was first placed in service. Assets such as roofs, HVAC systems, fire protection systems, and alarm and security systems are not eligible for bonus depreciation but are eligible for the Section 179 expense.

Taxpayers can also elect to take the Section 179 expense by individual asset, instead of opting in or out by asset class, as with bonus depreciation. This allows flexibility in controlling taxable income.

North Carolina Issues

In North Carolina, taxpayers are required to add to federal adjusted gross income 85% of the amount allowed as a bonus depreciation deduction under section 168(k) or 168(n) of the Code for property placed in service during the year. This adjustment does not result in a difference in basis of the affected assets for State and federal income tax purposes. If an addition was required and made by a taxpayer, the taxpayer may deduct 20% of the amount of the bonus depreciation add-back in the first five taxable years following the year the taxpayer is required to include the add-back in income.

Section 179 Expensing Limitations

Beginning with tax year 2010, North Carolina did not conform to the same Code section 179 expensing limitations allowed for federal income tax purposes. Instead, North Carolina has separate dollar and investment limitations.

Taxpayers placing section 179 property in service during these years are required to add to federal taxable income or federal adjusted gross income, whichever is applicable, 85% of the federal section 179 deduction in excess of the amount allowed using the North Carolina limits, which is $25,000. If an addition is required and made by a taxpayer, the taxpayer may deduct 20% of the section 179 add-back in the
first five taxable years following the year the taxpayer is required to include the add-back in income.

Knowing the key differences in the way North Carolina differs from the IRS code may be essential in reducing total tax owed in the current year, as well as planning for the future. Taxpayers should consult a tax professional to determine what is best for their personal situation.