The Tax Cuts and Jobs Act of 2017 has expanded the definition of Section 179 expensing to effectively include improvements to nonresidential roofs, while raising the amount a taxpayer may expense on qualifying real property. Section 179 allows taxpayers to immediately expense costs of qualifying property rather than recovering such costs over multiple years through depreciation.
According to the National Association of Tax Professionals, “The definition of Section 179 property in the tax code has been expanded to include the following improvements to nonresidential real property placed in services 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.” Taxpayers have the option to elect to include such property in their Section 179 expensing calculation.
The law expands the expensing limits to $1,000,000 from $500,000, and the phase-out threshold has been increased from $1,000,000 to $2,500,000. The rules are effective for properties placed in service after December 31, 2017.
While the increase in the expensing limit and phase-out threshold is great news, the phase-out can add up quickly and make Section 179 expensing unavailable for many taxpayers, according to Rebekah Feather of tax firm Grant Thornton LLP. Taxpayers have to consider all Section 179 qualified property placed into service during the year when determining the $2,500,000 threshold. Once a taxpayer has placed $2,500,000 of qualified assets into service in any given year, the Section 179 deduction is reduced dollar-for- dollar for the amount the taxpayer has placed in service above the threshold. Any property above the limitation would be depreciated over the appropriate recovery period, which for nonresidential roofs is generally 39 years. For taxpayers under the limitation, this presents a planning opportunity to currently expense capital improvements to roofs.
Another planning opportunity frequently overlooked by taxpayers is whether common repairs such as replacing the membrane on a roof are considered a capital improvement for tax purposes or whether the activities are a currently deductible repairs expense. The final regulations under Section 263(a) that were issued in 2013 provide taxpayer favorable examples of expensing such replacements as repairs.