7912 / What temporary bonus depreciation rules may apply in the context of a cattle program?

Temporary Bonus Depreciation Rules

The rules governing bonus depreciation have been amended several times. Under the 2017 tax reform legislation, the following rules apply.

Bonus first-year depreciation applies only to qualified property. It is claimed in the first year that the property is placed in service. It is the following percentage of the unadjusted depreciable basis of qualified property:

Property placed in service after September 27, 2017 and before January 1, 2023: 100 percent expensing.

Property placed in service after December 31, 2022 and before January 1, 2024: 80 percent expensing.

Property placed in service after December 31, 2023 and before January 1, 2025: 60 percent expensing.

Property placed in service after December 31, 2024 and before January 1, 2026: 40 percent expensing.

Property placed in service after December 31, 2025 and before January 1, 2027: 20 percent expensing.

2027 and thereafter: 0 percent expensing.²

In the case of qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after September 27, 2017, different rules apply. If the property was placed in service before January 1, 2018, 50 percent expensing applies. If the property was placed in service in 2018, 40 percent expensing applies. If the property was placed in service in 2019, 30 percent expensing applies, and if the property is placed in service after 2019, zero percent expensing is permitted.³

For qualified property first placed into service by the taxpayer during the first taxable year ending after September 27, 2017, the taxpayer could elect to have 50 percent apply instead of the relevant percentage applicable to the year in question.⁴

Election to Expense or Capitalize Certain Expenses

Bonus depreciation provisions have typically been enacted only during economically difficult times, and for short periods. In one form or another, however, IRC Section 179 has been around for a long time. Under that provision, a limited amount of the cost to acquire cattle (or other depreciable property) can be expensed in the year when the cattle (or other property) is first placed in service (even by the tax shelters, corporations, and partnerships required to capitalize other expenses).⁵ In the case of partnerships and S corporations, the election to expense a portion of capital costs is made at the partnership or S corporation level.⁶ The deduction can apply to several pieces of property used in the active conduct of the trade or business. The aggregate cost deductible under IRC Section 179 for taxable years beginning after 2007 and before 2010 could not exceed $250,000; for taxable years beginning in 2010 and before 2018, the aggregate deductible cost could not exceed $500,000.⁷ For those two periods, the deductible amount must be reduced by one dollar for each dollar of such investment above $800,000 or $2 million, respectively. The $250,000/$2 million were made permanent by PATH 2015.⁸

The 2017 tax reform legislation increased the maximum amount that can be expensed during the tax year to $1,000,000,⁹ and increased the phase-out threshold amount from $2,000,000 to $2,500,000.¹⁰ These amounts are indexed for inflation (using the new chained CPI indexing method) for tax years beginning after 2018).  The amounts are $1,050,000 and $2,620,000 in 2021, $1,080,000 and $2,700,000 in 2022, $1,160,000 and $2,890,000 in 2023, $1,220,000 and $3,050,000 in 2024 and $1,250,000 and $1,130,000 in 2025.

The amount expensed is limited to the aggregate amount of taxable income derived from the active conduct of any trade or business of the taxpayer. An amount that is not deductible because it exceeds the aggregate income from any trade or business may be carried over and taken in a subsequent year. The amount carried over that may be taken in a subsequent year is the lesser of (1) the amounts disallowed because of the taxable income limitation in all prior taxable years (reduced by any carryover deductions in previous taxable years); or (2) the amount of unused expense allowance for the year. The amount of unused expense allowance is the excess of
(1) the maximum cost of property that may be expensed taking into account the dollar and income limitations; over (2) the amount the taxpayer elects to expense.¹¹

Married individuals filing separately are treated as one taxpayer for purposes of determining the amount that may be expensed and the total amount of investment in the property.¹² The dollar limit applies to partnerships and S corporations and to each partner and shareholder.¹³ A partner or S corporation shareholder will reduce basis in the partnership or S corporation to reflect his or her share of the cost of property for which an election to expense has been made whether or not the amount is subject to limitation at either the entity or partner/shareholder level.¹⁴ Also, the partnership or S corporation will reduce its basis by the amount of the deduction allocable to each partner or shareholder without regard to whether these individuals can use all of the deduction allocated to them.¹⁵ Recapture provisions apply if the property ceases to be used primarily in a trade or business before the end of the property’s recovery period. (For property placed in service before 1987, recapture is required only if the property was converted to nonbusiness use within two years after it was placed in service.)¹⁶ Also, amounts expensed under an election are treated as depreciation deductions for purpose of recapture on sale or disposition (see Q 7913).