Tax Reform: Full Expensing of Certain Business Assets

Businesses may finally be able to fully expense the cost of business property, including inventory. Under the provisions of the new tax reform bill, passed by congress today, there are three areas that expand current rules allowing for such expensing.


Small Business Accounting Method

Under current law, if a business falls under the rules for cash basis accounting, that business is exempt from the UNICAP and other accrual rules requiring accounting for inventory.  To be eligible for cash basis accounting rules, a business must not exceed $5 million in average annual gross receipts for ALL prior years.  Under the new tax bill, that threshold is increased to $25 million in average annual gross receipts over the last 3 years, exempting more businesses from the inventory capitalization rules, allowing those businesses to fully expense inventory costs.  Businesses that fall under the new rule will now enjoy full expensing of inventory when purchased, meaning lower taxable income, along with new, lower tax rates.


Section 179 Deduction

Under current law, section 179 allows for a deduction up to $500,000 for the cost of qualified property.  This amount is reduced by the dollar amount over $2,000,000.  Under the new tax bill, Section 179 expense would be increased to $1,000,000, reduced by the dollar amount over $2,500,000.  Furthermore, the new bill would expand the definition of qualified property to include roofs, heating, ventilation, air conditioning, fire protection, and security systems for nonresidential real property.  Again, the impact here is more expensing for businesses that purchase qualified property, lowering taxable income at the new, lower rates.


Bonus Depreciation

Bonus depreciation is a valuable tax tool for any business purchasing new property.  Current law allows for 50% bonus depreciation for the purchase of new property with a life less than 20 years.  This rule was set to reduce bonus depreciation in 2018 down to 40%, as low as 30% in 2019, and as low as 0% in 2020.

The tax reform bill, passed by the Senate last night, and again by the house today, would adjust bonus depreciation to 100% for property new to the taxpayer (which now includes used property) with a life less than 20 years.  Furthermore, this expansion of bonus depreciation will apply to property that was purchased after September 28, 2017.  Thus, businesses get the added benefit of the full 100% bonus depreciation in 2017, shielding them from the higher 2017 tax rates!
These changes carry substantial implications for the wider economy over the coming years.  These new rules offer broad incentives for companies to spend additional cash on deferred maintenance, new equipment, and expansion projects.  Coupled with businesses now being able to pay less in taxes, this may spur substantial growth in GDP over the coming years.