Except as noted, these changes in tax law apply to all businesses.
Bonus depreciation is vastly expanded. 100% bonus depreciation (up from 50%) is allowed on new and used assets (must be the taxpayer’s first use). Taxpayers may elect 50% bonus depreciation in 2018 only. Property eligible for 100% bonus depreciation deduction is generally those assets with a class life of 20 years or less. Certain qualified improvement property were intended to qualify, but technical correction legislation is needed to clarify the law. [Update: this drafting error was corrected by the CARES Act of 2020.] Other restrictions are placed on used assets, including a prohibition for property acquired from a related taxpayer. Bonus depreciation is applied to all assets by class, after taking Section 179 deduction (see below) and other restrictions. Taxpayers may elect out of bonus depreciation on a class-by-class basis, and instead depreciate property according to normal depreciation methods. There is no business income limitation on bonus depreciation. Bonus depreciation phases out over four years, beginning in 2023. Note: Iowa (and some other states) will not allow bonus depreciation in 2018 and later years. [Update: Iowa allows bonus depreciation for tax years beginning after 12/31/20.]
Section 179 (fast write-off) is dramatically increased. Section 179 property is tangible personal property used in the active conduct of a trade or business, and the first use by the taxpayer (used property qualifies). Added to qualified property are certain improvements to existing non-residential real property such as roofs, HVAC systems, etc. Estates and trusts may not take the Section 179 deduction. The new limit is $1,000,000, up from $510,000 in 2017. The deduction begins to phase out when the cost of qualifying property placed in service exceeds $2,500,000 (up from $2,030,000 in 2017). The deduction is limited to trade or business income. For Partnerships and S-Corporations, the limit is first applied at the entity level, and then again at the taxpayer level. Note: the Iowa limit in 2018 is
$25,000 for ALL corporations (legislation is pending for S-Corps as of 2/26/19), and $70,000 for all other qualifying taxpayers. The Iowa Section 179 limit for 2019 is $100,000 for all taxpayers, and Federal limits will be fully phased-in for Iowa for tax years beginning on or after 1/1/2020.
Like-kind exchange non-recognition of gain provisions are eliminated for trades except for real property. This means all trades (except real estate) will be treated as two separate transactions: 1) the taxable sale of the property traded, and 2) the purchase of the acquired asset at full price.
Example: A tractor is traded for another tractor in 2018. The list price of the acquired tractor is $397,000, and the dealer is offering $112,000 in trade for the old tractor, so the cash difference is $285,000. The old tractor was purchased for $250,000 some years back, and $188,738 depreciation was taken on it over the years, so it has a tax basis of $61,262. Under old law, the basis of the new tractor would be the $285,000 in cash paid or financed, plus the $61,262 remaining basis of the traded asset for a total basis in the new tractor of $346,262. No gain would be recognized, and the farmer could use up to $285,000 (the cash paid) in Section 179 write off. Starting in 2018, the taxpayer has a gain of $112,000 trade less basis of $61,262 = $50,738 taxable gain. This gain will be reported on his tax return in 2018. His basis for depreciation of the acquired tractor will be $397,000. He may take 100% bonus depreciation on all the 7-year class property he acquires during 2018, and deduct the entire cost of the new tractor. Or, he may elect to take part or all of the new tractor as a Section 179 deduction (subject to the limitations). The $50,738 taxable gain will be considered trade or business income for the Section 179 income limitation, but will not be subject to self-employment tax.
The practical effect of this change will be to reduce the amount of income subject to self-employment tax for most taxpayers. Some taxpayers, particularly high-income taxpayers, may be caught in a trap by this change! Estates and trusts can’t use Section 179, so choices are limited there. See Iowa State’s Center for Ag Law’s original take on this legislation for more explanation and examples.
Iowa is mandating the old non-recognition treatment for all like-kind exchanges in 2018, and allowing the taxpayer
(other than corporations) to elect to use the old rules on a trade-by-trade basis in 2019. Full compliance with the federal rules begins in 2020. Click here for more information.
Farmers may use the 200% declining balance method for property with a life of less than 15 years (formerly limited to 150% declining balance). The 150% method continues to apply to 15 or 20 year property. Instead of the 200% method, they may elect to continue to use the 150% method, or the ADS straight-line method. Farmers may depreciate new machinery or equipment that were formerly 7 year property over 5 years. Used equipment purchases, and new grain bins and fences must still be depreciated over 7 years. Iowa didn’t comply with this change in 2018, either.