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Changes to Depreciation

Posted by Admin Posted on Aug 22 2018


Business Clients,

With the end of the year quickly approaching, as a business owner, you may be thinking about trading in or buying new equipment to help lower any potential tax liability.  We would just like to remind you about the changes in the laws that took effect the beginning of 2018.  The 2017 Tax Relief Act eliminated Section 1031 exchange.  Prior to this change, when there was a like-kind-exchange done on assets, the gain on the sale of the asset was deferred and the tax basis of the vehicle was adjusted accordingly when added to the books.  With the 2017 Tax Relief Act, there is no more like-kind-exchange.  When an asset is sold or traded, the gain on the sale must be recognized as ordinary income.   The good news is that the asset will be put on the books at the value paid and not the adjusted value which will give the option to take more Section 179 Depreciation to compensate for the gain on the sale.    Also, there is an option to take Bonus Deprecation.  The Section 179 Depreciation limit has been increased to $1 million and unlimited bonus deprecation for both used and new property.

There are a few things to keep in mind:                                    

·         Contact us prior to making any big decisions so you can be fully aware of any tax consequences.

·         Section 179 Depreciation is limited to $1 million. 

·         There is a five-year sunset on the 100% bonus depreciation.

·         For 1040 clients, the gain from selling an asset is recognized as ordinary income which is not subjected to self-employment taxes.  Using depreciation to reduce any gains and lower tax liability may reduce the amount of self-employment tax being paid in.  This may result in a significant reduction of Social Security benefits being paid out in the future. 

·         If opting to take 100% bonus deprecation, be aware that the state of Maine does not recognize Bonus Deprecation and will not reduce any state tax liabilities. 

·         If any assets are bought or sold, please provide us with the details of the transaction. 

Please call us with any questions or concerns you have.