After Tax Reform, Manufacturers Need to Know about New Depreciation Rules

March 13, 2018

Encouraged by changes in tax laws, including new tax depreciation rules, manufacturers have a high level of optimism.

Almost 95 percent of 14,000 large and small manufacturers surveyed told the National Association of Manufacturers that they consider the outlook for their company positive. That’s higher than at any point in the survey’s 20-year history.

A by-product of this confidence? Capital investments.

According to the survey, conducted in December as federal tax reform was concluding, almost 63 percent said comprehensive business tax reform would increase capital spending.

If that describes your company, you’ll want to know how new tax depreciation rules come into play.

More of Investments Qualify

New Section 179 rules allow you to write off up to $1 million of costs associated with qualifying purchases in the year the assets are placed in service. That’s double the previous limit of $500,000.

This change is designed for small to midsize companies. Once you purchase $2.5 million in fixed assets, this benefit starts to phase out. When a company hits $3.5 million, no further benefit is allowed and normal depreciation rules apply.

The new tax code also expands qualifying capital improvements to include assets such as roofs, HVAC systems, fire protection and alarms, and security.

Realize Tax Benefits Faster

Another benefit is the ability to take a 100 percent bonus depreciation deduction in the first year assets are placed in service, a change that can have huge impact on cash flow. Prior tax law allowed for a 50 percent bonus depreciation deduction.

Here’s an important aspect of the new tax depreciation rules. The old tax rules apply to assets acquired on or before Sept. 27, 2017. But for qualified property that’s both acquired and placed in service after that date, 100 percent of the adjusted basis of the property can be deducted in the year the property is first placed in service.

“Placed in service” is an important distinction because customization and installation can delay the use of a purchase. Placed in service date and purchase date are rarely the same for manufacturing equipment.

Used Assets Now Qualify

New tax laws allow bonus depreciation on used property, removing the restriction that required you to be the original purchaser. This is another important change for manufacturers, who often purchase used equipment.

This benefit won’t last forever: This additional expensing is currently set to reduce by 20 percent each year starting in 2023 and expire completely after 2026.

Tax Depreciation Rules: Summary

As your company considers expansion, your challenge is to understand how the new tax rules can help pay for growth projects.

There are now tax benefits that didn’t exist before, such as writing off the cost of nearly all equipment in the year it is placed in service. This is likely to reduce taxable income and the amount of tax paid.

Evaluate your major purchases to see if they qualify.

More manufacturing content: When Reshoring, Think Tax Breaks and Costs