Depreciation & Changes under Tax Cuts and Jobs Act

Depreciation & Changes under Tax Cuts and Jobs Act Kevin C. Kennedy, CPA, CFE Maloney & Kennedy, PLLC Auburn, New Hampshire kkennedy@maloneyco.com (603) 624-8819

Quotes – Can you name the movie? “You’re gonna need a bigger boat” “I’ll have what she’s having” “You son of a motherless goat” “I don’t wanna kill you and you don’t wanna be dead” “He talks! Yeah its getting him to shut up that’s the problem” “You had me at hello”

So “Hello” • Kevin Kennedy has been a certified public accountant since 1995 and is a graduate of Southern New Hampshire University (Previously New Hampshire College) in Manchester, New Hampshire and has worked both in the private and public sectors of accounting. • Kevin holds memberships with the American Institute of Certified Public Accountants, the New Hampshire Society of Certified Public Accountants and Association of Certified Fraud Examiners. • Kevin is treasurer and on various boards and committees including • The New Hampshire Association of Certified Public • NH CPA society Tax and Legislative Committee • Concord Chamber of Commerce State Tax and Legislative Committee • https://www.maloneyandkennedy.com/ • Maloney and Kennedy PLLC is based in New Hampshire with offices in Auburn and Concord • Services include a focus in Litigation Support Services and Business Valuations but also Tax and Financial Statement services

What Often Happens • What normally happens when tax preparers work with their clients on fixed assets and depreciation? • We use software which we rely on to properly calculate depreciation, including: • Software chooses the method (i.e. MACRS) • Software chooses the asset life (based on selection) • Bonus depreciation is automatic unless you elect out of it • 179 usually needs to action to be elected • Software may or may not address other taxation items including State, AMT, Book • From here, the tax preparer needs to consider what else may need to be done

Potential Software Issues • Has it properly accounted for the basis across all depreciation methods (book, tax, AMT, State, etc.)? • This can create M-1/M-2/M-3 issues • Wrong gains or losses on disposal for AMT or States • Have you added a new state and has it properly accounted for the history of those assets • Has it selected the proper asset life for all methods? • Have you considered depreciation will be different for different states given 179 limitations and whether they allow for the same amount as federal? • Has 179 election been considered and analyzed? • Does income limitation include all items of net income allowed (i.e. wages)? • Has property that’s been acquired also been placed in service? • Are the cumulative in-service dates correct for proper use of the Mid-Quarter or Half Year Conventions? • Have 1231 recapture amounts for the last 5 years been addressed? • Have 179 carryovers or other carryovers been properly accounted for? • Has bonus depreciation been considered and potentially elect out of it?

The Tax Cuts and Jobs Act of 2017 (TCJA) “I've got a feeling we're not in Kansas anymore.” “On December 22, 2017, the most sweeping tax legislation since the Tax Reform Act of 1986 was signed into law: The Tax Cuts and Jobs Act of 2017 (TCJA).”

Under the Tax Cut and Jobs ActWhat (Asset) Sections Changed? Code Section 179 Election Bonus Depreciation Research and Experimentation Costs Automobiles

Increased Code 179 expensingHighlights • Starting 2018, Code Sec. 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million • Indexed for inflation • Qualified property expanded to include: • Depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. • Improvements to nonresidential real property after the date such property was first placed in service: roofs, heating, ventilation, and air-conditioning property; fire protection and alarm systems, and security systems

Bonus Depreciation Highlights • The phase-down of the 50% bonus allowance for property placed in service after Dec. 31, 2017, and for specified plants planted or grafted after that date, is repealed • A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 • Qualified Property includes Used Property

Research and Experimentation Expenses • Starting 2022 – Research and Experimentation expenses must be capitalized over 5 years • Includes any software development but not software purchases or improvements to land or building

Automobile Highlights The maximum amount of allowable depreciation is increased to: • $10,000 for the year in which the vehicle is placed in service • $16,000 for the second year • $9,600 for the third year • $5,760 for the fourth and later years in the recovery period. For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation. For passengers autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000.

Quote “I am serious… and don’t call me Shirley.”

Increased Code 179 ExpensingPrior Law Subject to limitations, including potentially taxable income levels, taxpayer could elect under Code Sec. 179 to immediately deduct the cost of current year purchased qualifying property. The maximum amount a taxpayer could expense was $500,000 of the cost of qualifying property placed in service for the tax year. The $500,000 amount was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $2 million. Qualifying property was generally defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business, and includes off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Passenger automobiles subject to the Code Sec. 280F limitation are eligible for Code Sec. 179 expensing only to the extent of the Code Sec. 280F dollar limitations. For sport utility vehicles above the 6,000 pound weight rating and not more than the 14,000 pound weight rating, which are not subject to the Code Sec. 280F limitation, the maximum cost that may be expensed for any tax year under Code Sec. 179 is $25,000.

Increased Code 179 expensingNew Law • For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million • The phase-out threshold amount is increased to $2.5 million • For tax years beginning after 2018, these amounts (as well as the $25,000 sport utility vehicle limitation) are indexed for inflation • The TCJA also expanded the definition of Code Sec. 179 property, also effective for property placed in service in tax years beginning after 2017, to allow taxpayers to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service: • Qualified improvement property: any improvement to a building’s interior, except improvements attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building • Roofs, HVAC, fire protection systems, alarm systems and security systems

A Refresher on Phase-Out For 2018 - 2.5 Million is the maximum amount that can be spent on equipment before the Section 179 Deduction available begins to be reduced. Reduced on a dollar for dollar basis after 2.5M. Businesses that spend more than $3.5 million on equipment won’t get the deduction.

A Reminder on Net Income From Trade or Business • In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. • Net income or loss from a trade or business includes the following items: • Section 1231 gains (or losses) • Interest from working capital of your trade or business • Wages, salaries tips, or other pay earned as an employee and reported on line 7 of your 1040. (If married filing joint return, you must include your spouse’s income as well). The net income (or loss) from a trade or business actively conducted by an S corporation is determined by taking into account the aggregate amount of the S corporation's items described in section 1366(a) (other than credits, tax-exempt income, and deductions for compensation paid to an S corporation's shareholder-employees) derived from that trade or business. • If the business is a Sole Proprietorship (Schedule C or Schedule F on your personal tax return), claiming Section 179 will be allowed IF there is other 'earned income' on the tax return (such as W-2 wages). If there is not enough 'earned income' for the Section 179 to offset, it will be carried to the next year. • In addition, figure taxable income without regard to: • Section 179 deduction • Self-employment tax deduction • Any net operating loss carryback or carryforward • Any unreimbursed employee business expenses

A reminder on 179 The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction

Bonus DepreciationPrior Law An additional first-year bonus depreciation deduction was allowed equal to 50% of the adjusted basis of qualified property, the original use of which began with the taxpayer, placed in service before Jan. 1, 2020. The 50% allowance was phased down for property placed in service after Dec. 31, 2017. A first-year depreciation deduction was also electively available for certain plants bearing fruit or nuts planted or grafted after 2015 and before 2020. Film productions were not eligible for bonus depreciation.

Bonus DepreciationNew Law A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 (repeals prior law) Property acquired prior to Sept. 28, 2017, but placed in service after Sept. 27, 2017, would remain eligible for bonus depreciation under pre-Act law (i.e., 50 percent bonus). The acquisition date for property acquired pursuant to a written binding contract is the date of such contract.

Bonus DepreciationNew Law • Qualified Property • Property depreciated under the Modified Accelerated Cost Recovery System (MACRS) that has a recovery period of 20 years or less (generally, tangible personal property): • Certain computer software • Water utility property • Qualified film or television productions • Qualified live theatrical productions • Specified plants • Congress intended for Qualified Improvement Property placed in service after 2017 to have a 15-year MACRS recovery period, which would make it eligible for bonus depreciation. However, due to a drafting error, the 15-year recovery period for QIP isn’t reflected in the statutory language of the TCJA. Presumably there will be a technical correction to fix this. QIP is defined as any improvement to the interior portion of nonresidential real property when such improvement is placed in service after the date such building was first placed in service. QIP does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

Bonus DepreciationNew Law The additional first-year depreciation deduction is allowed for new and used property. The new law eliminates the requirement that the original use of the qualified property begin with the taxpayer, as long as the taxpayer had not previously used the acquired property and the property was not acquired from a related party. The inclusion of used property is a significant change from previous bonus depreciation rules. This may be particularly important when a business is sold using the asset sale method. 100% bonus is allowed if all the follow apply the taxpayer (or a predecessor) didn’t use the property at any time before the acquisition; the property wasn’t acquired from a related party or from a component member of a controlled corporate group; the taxpayer’s basis in the used property isn’t figured by reference to the basis of the property in the hands of the seller or transferor. The new law added qualified film, television and live theatrical productions as types of qualified property that are eligible for 100% bonus depreciation. Certain types of property are not "qualified property" eligible for bonus depreciation, including most public utility property and any property used in a trade or business that has floor-plan financing.

Bonus Depreciation Election not to apply “I'm gonna make him an offer he can't refuse." • Taxpayers can still elect not to claim bonus depreciation for any class of property placed in service during the tax year. The election out of bonus depreciation is an annual election. • Once made, the election cannot be revoked without IRS consent. • Proposed regsprovie a transition rule provides that for a taxpayer’s first taxable year ending after September 27, 2017, the taxpayer may elect to apply a 50 percent allowance instead of the 100 percent allowance.

100% Bonus vs. 179What’s the difference? "Frankly, my dear, I don't give a damn." 179 Expense election only deductible to extent of income, Bonus depreciation can create a loss 179 elect to take it, bonus depreciation elect out of it by class 179 deduction elect an amount up to option, Bonus depreciation elected by class Limits on 179 -1M AND Limited if total purchases are too high, Bonus depreciation no limits

Automobiles Prior Law • Code Sec. 280F limits the Code Sec. 179 expensing and cost recovery deduction with respect to certain passenger autos. This is often referred to as the “luxury automobile depreciation limitation,” even though it applies to vehicles not commonly considered “luxury automobiles.” Passenger automobiles, by definition, weigh 6,000 pounds gross vehicle weight or less. • Under pre-Act law, for passenger autos placed in service in 2017, for which bonus depreciation is not claimed, the maximum amount of allowable depreciation deduction is • $3,160 for the year in which the vehicle is placed in service • $5,100 for the second year • $3,050 for the third year • $1,875 for the fourth and later years in the recovery period • This limitation is indexed for inflation. • IRS has applied a different inflation adjustment for cars than for those vehicles on a truck chassis, including light-duty trucks and vans. • $3,560 for the year in which the vehicle is placed in service • $5,700 for the second year • $3,450 for the third year • $2,075 for the fourth and later years in the recovery period • For passenger automobiles eligible for the bonus depreciation allowance in 2017, the first-year limitation is increased by an additional $8,000. This amount was phased down from $8,000 by $1,600 per calendar year beginning in 2018.

AutomobilesNew Law • For passenger automobiles placed in service after Dec. 31, 2017 for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is increased to: • $10,000 for the year in which the vehicle is placed in service, • $16,000 for the second year, • $9,600 for the third year, and • $5,760 for the fourth and later years in the recovery period. • For passenger automobiles placed in service after 2018, these dollar limits are indexed for inflation. • For passengers autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. • In addition, computer or peripheral equipment is removed from the definition of listed property, and so isn't subject to the heightened substantiation requirements that apply to listed property. • For passenger automobiles acquired before Sept. 28, 2017, and placed in service after Sept. 27, 2017, the pre-Act phase-down of the Code Sec. 280F increase amount in the limitation on the depreciation deductions applies.

AutomobilesNew Law • There is a §179 on Sport Utility Vehicles (SUVs) with a gross vehicle weight rating above 6,000 lbs. • No depreciation or §179 limits apply to SUVs with a GVW more than 14,000 lbs. • Trucks and vans with a GVW rating above 6,000 lbs. but not more than 14,000 lbs. generally have the same limits: no depreciation limitation, but a $25,000 IRC §179 deduction. • Although SUVs purchased after September 27, 2017, remain subject to the $25,000 IRC § 179 limit, they are eligible for 100% bonus depreciation if they are above 6,000 lbs

Passenger Auto vs SUV • Passenger automobile: generally a four-wheel vehicle that is for use on public roads and weighs 6,000 pounds or less. However, there are two sets of depreciation limit amounts under Sec. 280F, one for passenger automobiles other than trucks and vans (autos) and one for trucks and vans, which include passenger automobiles that are built on a truck chassis, such as some minivans and sport utility vehicles (SUVs). Significantly, for autos, the 6,000-pound limit is based on the unloaded gross vehicle weight of the auto, while for trucks and vans, the 6,000-pound limit is based on loaded gross vehicle weight, which includes passengers and cargo. Often full-size pickups and larger vans will be over the 6,000-pound limit and not subject to the Sec. 280F depreciation limits So, the portion of the cost of a heavy SUV that isn't expensed under Code Sec. 179 can (1) be depreciated over the 5-year MACRS recovery period without regard to the depreciation dollar caps for luxury autos , and, (2) receive bonus first-year depreciation if the heavy SUV is “qualified property” (and if bonus first-year depreciation is in effect).

Vehicles & Like Kind Exchanges Under the Tax Cuts and Jobs Act, the rules no longer apply for exchanges after Dec. 31, 2017. Like-kind exchange treatment—i.e., the non-recognition of gain or loss—is limited to the exchange of real property held for productive use in a trade or business or for investment solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. (Code Sec. 1031(a)) Thus, under the Tax Cuts and Jobs Act, exchanges of autos after Dec. 31, 2017, do not qualify as tax-free under Code Sec. 1031(a). The taxpayer will have gain or loss on the traded-in auto, depending on its trade-in value and the remaining basis in it. The new auto's basis for depreciation will be its cost and it will be subject to the Code Sec. 280F luxury auto dollar limits as if it were acquired via an all-cash purchase. BUT: Where depreciation on the traded-in auto was limited by the Code Sec. 280F dollar caps, the taxpayer's remaining basis in it may well exceed the auto's trade-in value, particularly if the auto was a more expensive model. Here, the result will be a loss that's recognized just as if it would be if the car were sold outright instead of being traded in.

Vehicle Related Prior to 2018, employees could deduct unreimbursed auto expenses on Schedule A, Form 1040, as miscellaneous itemized deductions, deductible to the extent such deductions cumulatively exceeded 2% of adjusted gross income. Under the Tax Cuts and Jobs Act, effective for tax years beginning after 2017 and before 2026, miscellaneous itemized deductions (including unreimbursed employee business expenses) are disallowed(Code Sec. 67(g)) .

Real Property-Prior Law • The cost recovery periods for most real property are 39 years for nonresidential real property and 27.5 years for residential rental property. The straight line depreciation method and mid-month convention are required for such real property. • Under pre-Act law – “Qualified Real Property” i.e. eligible for 179 deduction consisted of: • Qualified leasehold improvement property - improvement to the interior of a non-residential building if: 1.The improvement is made pursuant to a valid lease; 2.Such portion is occupied exclusively by the lessee or sub-lessee (not common area);3.The improvement is placed in service more than 3 years after the date the building was firstplaced in service; 4.A lease between related persons does not qualify • Qualified restaurant property was either (a) a building improvement in a building in which more than 50% of the building's square footage was devoted to the preparation of, and seating for, on-premises consumption of prepared meals (the more-than-50% test), or (b) a building that passed the more-than-50% test. • Qualified retail improvement property was an interior improvement to retail space that was placed in service more than three years after the date the building was first placed in service and that meets other requirements. Roofs, HVAC, alarm & protection systems were almost always considered building components, and did not qualify for section 179 property unless they were qualified real property Qualified Improvement Property (QIP) existed and was defined as any improvement to an interior portion of a building that is nonresidential real property as long as that improvement is placed in service after the building was first placed in service by any taxpayer. QIP was not eligible for Section 179 unless it also met the definition of a Qualified Leasehold Improvement, Qualified Retail Improvement, or Qualified Restaurant Property.

Real Property New Law • “If you build it, they will come.” • For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated and we are left with Qualified Improvement Property. • A general 15-year recovery period and straight-line depreciation are provided for qualified improvement property, and a 20-year ADS recovery period is provided for such property. • Reminder: due to a drafting error, the 15-year recovery period for QIP isn’t reflected in the statutory language of the TCJA. Presumably there will be a technical correction to fix this. • AS such, QIP placed in service after Dec. 31, 2017, is presumably : • Generally depreciable over 15 years using the straight-line method and half-year convention • Without regard to whether the improvements are property subject to a lease • Placed in service more than three years after the date the building was first placed in service, or made to a restaurant building • For property placed in service after Dec. 31, 2017, the ADS recovery period for residential rental property is shortened from 40 years to 30 years. (Code Sec. 168, as amended by Act Sec. 13204).

Other Depreciation under TCJA • New farming equipment and machinery is 5-year property. • Cost recovery period is shortened from seven to five years for any machinery or equipment (with some exceptions i.e. grain bins, cotton ginning items) used in a farming business the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. • Costs of replanting citrus plants lost due to casualty- • For replanting costs paid or incurred after Dec. 22, 2017, but no later Dec. 22, 2027, for citrus plants lost or damaged due to casualty, the costs may also be deducted by a person other than the taxpayer if • (1) the taxpayer has an equity interest of not less than 50% in the replanted citrus plants at all times during the tax year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest, or • (2) such other person acquires all of the taxpayer's equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land. (Code Sec. 263A(d), as amended by Act Sec. 13207)

Remember the Repair Regs "Nobody puts Baby in a corner." Consider the de minimis safe harbor for expensing amounts under the repair regulations. Under Regs. Sec. 1.263(a)-1(f), taxpayers with applicable financial statements can expense amounts paid to acquire or produce units of tangible property to the extent those amounts are deducted by the taxpayer for financial reporting purposes or in keeping books and records. The amount deductible is up to $5,000 per invoice or per item substantiated by the invoice. Taxpayers without applicable financial statements can expense amounts paid for units of property up to $2,500 (this amount was increased from $500 by Notice 2015-82, effective for tax years beginning on or after Jan. 1, 2016). Generally requires an affirmative election – each year

Remember recapture "I feel the need—the need for speed!" • 1231 recapture • Under Code Sec. 1231: • If there's a net gain for the tax year from; • (1) sales and exchanges of 1231 property used in a trade or business • (2) involuntary or compulsory conversions of certain assets used in the trade or business or held in connection with a trade or business or a transaction entered for profit • It's treated as long-term capital gain • A net loss is treated as an ordinary loss. • Section 1231 gains and losses are reported and netted on Form 4797. • BUT…. A net Section 1231 gain is treated as ordinary income to the extent of nonrecaptured net Section 1231 losses.

Remember recapture • 1231 recapture • A nonrecaptured net Section 1231 loss is: • The net Section 1231 loss for; • The five most recent preceding tax years that hasn't been offset by a net Section 1231 gain in an intervening tax year • Net Section 1231 gain means the excess of the Section 1231 gains over the Section 1231 losses. • Net Section 1231 loss means the excess of the Section 1231 losses over the Section 1231 gains • So essentially, any 1231 Gain will be treated as ordinary income to the extent there were 1231 Losses over the last 5 years. • Any recapture amount taxed at ordinary rates is applied against the basis to determine any remaining capital gain. • This could be important for planning purposes particularly with the sale of a business.

Remember recapture • Un-recaptured 1250 gain: • Refers to the 'gain' (profit) when you sell real estate (Section 1250) and it was depreciated using straightline, so unrecaptured. Can include accelerated on older buildings so potentially could include depreciation that needs to be recaptured. • Taxed at your regular tax bracket, up to a maximum of 25%. • This may be important for planning purposes, 15/20% amounts do not apply to unrecaptured 1250 gain/depreciation on real estate.

Remember recapture • Installment sale issues with recapture • Normally gain can be deferred using the installment method over the period payments are received. • However – • 1231 depreciation recapture is reported fully in the year of the sale regardless of payment amounts received from an installment sale. • Capital gain from an installment sale of depreciable real property consists of both unrecaptured section 1250 gain (25%-rate gain) and adjusted net capital gain, then, as payments are received, the taxpayer takes 25%-rate gain into account before any adjusted net capital gain is included – i.e. gain is “front-loaded”.

Other Considerations relative to accelerated deduction • Taking more depreciation up front may not be the best choice – consider if accelerating the depreciation results in the best overall tax effect • Should depreciation resemble cash flow?

Quick Example-Does not include consideration of credits

Other Considerations relative to accelerated deduction “Life is like a box of chocolates, you never know what you’re gonna get.” • Are we losing credits in the current year or subsequent years ? • Education Credits - The full credit may be claimed by people with adjusted gross income (AGI) of up to $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. • Child Tax Credits - The Child Tax Credit under 2018 tax reform is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit). • The refundable portion of the credit is limited to $1,400. This amount will be adjusted for inflation after 2018. • The earned income threshold for the refundable credit is lowered to $2,500. • The beginning credit phase-out for the CTC increases to $200,000 ($400,000 for joint filers). The phase-out also applies to the new family tax credit.

Other Considerations relative to accelerated deduction • Passive Activity Loss Limitations: • Generally, if your modified adjusted gross income is $150,000 or more, you can't claim this deduction at all. If you make $100,000 or more, the deduction is limited to half the difference between $150,000 and your modified adjusted gross income. For example, if your modified adjusted gross income is $110,000, your deduction is limited to ($150,000 - $110,000) / 2, or $20,000. • The married filing separately rental loss limits are more stringent, with the cutoff set at $75,000 rather than $150,000, and the amount decreasing once your income rises above $50,000. Generally if you are married and lived with your spouse at all during the tax year, but you're filing separate returns, you can't claim the allowance at all. • The dollar limitation applies at the partnership level as well as to each partner. In applying the dollar limitation to a taxpayer that is a partner in one or more partnerships, the partner's share of section 179 expenses allocated to the partner from each partnership is aggregated with any non-partnership section 179 expenses of the taxpayer for the taxable year. • Similar limitations may apply to S Corporation Shareholders and • There may also be basis limitations that limit losses

Other Considerations relative to accelerated deduction and other provisions of the TCJA • How will accelerated depreciation effect my deduction under the new Qualified Business Income Deduction? • Taxable Income Figures might effect the QBI calculation • For service business you may want to keep taxable income below certain thresholds to allow for QBI deduction • New Net Operating Loss Carryover rules under the TCJA : • Under the TCJA, the NOL deduction for a tax year is equal to the lesser of (1) the aggregate of the NOL carryovers to such year, plus the NOL carry-backs to such year, or (2) 80% of taxable income (determined without regard to the deduction) (Sec. 172(a)). Generally, NOLs can no longer be carried back but are allowed to be carried forward indefinitely (Sec. 172(b)(1)(A)). • NOLs created in tax years beginning before January 1, 2018 are subject to the old rules. Only NOLs generated in tax years beginning after December 31, 2017 are subject to the new rules. • New Rules on Like Kind Exchanges: • Limited to Real Estate – Construction Companies use to replacing equipment and deferring gain when accelerated depreciation was used could be in for a shock associated with gain on the trade in.

New England State Considerations Many New England States do not conform with the federal 179 or 166 depreciation deductions. As such, tax preparers need to have schedules that track both. State returns will generally have lines which provide for the depreciation variance between federal and state.

New England State Considerations New Hampshire: • In 2012, New Hampshire had adopted a federal “Section 179” deduction capped at $25,000. The most recent law applies to property placed in service on or after January 1, 2017 and moves the cap from $25,000 to $100,000. • New Hampshire does not allow bonus depreciation of any kind.

New England State Considerations Maine: • In response to the Tax Cuts and Jobs Act (TCJA) of 2017 Maine passed an income tax conformity bill on September 12, 2018. The legislation updates the IRC conformity date from December 31, 2016 to March 23, 2018. • Maine will continue to conform to the Federal Section 179 limits. • Maine decouples from the federal bonus depreciation provisions. • The Maine Capital Investment Credit, applicable to assets placed in service in Maine for which federal bonus depreciation was taken, is unchanged.

New England State Considerations Vermont: • Has enacted legislation to revise its IRC conformity date to 12/31/2017, for tax years beginning on or after 01/01/2017, thereby conforming to the changes resulting from the federal Tax Cuts and Jobs Act. • Vermont currently allows 179 same as federal • But; • Vermont does not recognize the bonus depreciation allowed under federal law.

New England State Considerations Massachusetts: • Generally conforms to the IRS code at January 2005, except in certain areas it conforms to the code in the current taxable year. • Taxpayers are allowed a I.R.C. §179 deduction in the same amount as allowed federally. • Mass decoupled from the adoption of Code section 168(k)/ bonus depreciation. 1231 Property For Federal taxes, If gain, property is taxed as if a capital asset. If sale is a loss it is taxed as if ordinary income subject to recapture. MA law makes it a capital asset always, not subject to recapture as ordinary income.

Thank you! “Have fun storming the castle!” and “Hasta la vista, baby!” Kevin C. Kennedy, CPA, CFE Maloney & Kennedy, PLLC Auburn, New Hampshire kkennedy@maloneyco.com (603) 624-8819

Depreciation & Changes under Tax Cuts and Jobs Act