As part of National Small Business Week, the Internal Revenue Service is highlighting changes in depreciation and expensing rules for businesses. In some cases, the changes allow small-business owners and self-employed individuals to write of the costs of machinery, equipment and other property more quickly than before.

The IRS has some key points small-business owners should keep in mind.

Bonus means Bonus

One of the biggest upgrades for business owners is that the bonus depreciation percentage is now 100 percent for qualified property that’s placed in service between Sept. 27, 2017, and Jan. 1, 2023. With this change, businesses can often write off the full cost of most depreciable property in the very first year they use it in the business.

Qualified film, TV and live theatrical productions may also qualify for the 100 percent bonus depreciation.

Generally, depreciable business assets with a 20-year recovery period qualify, including machinery, equipment, computers, appliances and furniture. Special rules apply, though, for longer-production-period property and certain aircraft.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. Taxpayers can elect to include certain improvements made to nonresidential real property. See New rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act for details.

Depreciation Limits on Luxury Automobiles

The Tax Cuts and Jobs Act (TCJA) changed depreciation limits for passenger vehicles placed in service starting in tax-year 2018. If a business doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

• $10,000 for the first year,
• $16,000 for the second year,
• $9,600 for the third year, and
• $5,760 for each later taxable year in the recovery period.

If 100 percent bonus depreciation is claimed, the greatest allowable depreciation deduction is:

• $18,000 for the first year,
• $16,000 for the second year,
• $9,600 for the third year, and
• $5,760 for each later taxable year in the recovery period.

These amounts apply to property placed in service starting in 2018.

Real Property Gets Quicker Recovery Period

Generally, the recovery period for residential rental property is 27.5 years. The tax reform legislation changed the alternative depreciation recovery period for residential rental property to 30 years, down from the old standard of 40 years.

Under the new tax law, a real property trade or business that elects out of the interest deduction limit has to use the alternative depreciation system to depreciate any of its residential rental property. The changes took effect in tax year 2018.

More Resources for Businesses

For details on depreciation, expensing and other pertinent changes in the tax law for small businesses, check out these resources:

• Publication 535, Business Expenses
• Publication 946, How to Depreciate Property
• Publication 5318, Tax Reform: What's New for Your Business

Or check out the Tax Reform Provisions that Affect Businesses page for other updates.