The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes to the property eligible for tax-free treatment in like-kind exchange transactions under IRC Sec. 1031. Under previous law, non recognition of gain applied to like-kind exchanges of (1) depreciable tangible personal property; (2) intangible or non depreciable personal property; and (3) real property. After December 31, 2017, like-kind exchanges, and thus deferred gain treatment, will only be allowed for exchanges of real property not primarily held for sale. Exchanges of personal property, most notably automobiles, will no longer qualify for like-kind exchange treatment; those exchanges now result in taxable gain or loss in the year of exchange.
This new TCJA like-kind exchange restriction has many companies worried about purchasing new vehicles, as the tax-free benefit on the gain of the trade in is now lost. We are here to tell you – don’t panic! There are depreciation provisions in the TCJA that will help counter the loss of like-kind exchange benefits, some of which are very specific to automobiles. Often, these new provisions will actually result in a greater year-one tax savings on automobiles than previously received with like-kind exchange treatment.
The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The new law also expanded the definition of what property qualifies for 100% bonus depreciation. Prior to the TCJA, used property was not eligible for bonus depreciation. However, after Sept. 27, 2017, property acquired in used condition but of first use to the taxpayer will generally qualify for 100% bonus depreciation (i.e., full expensing).
The new law also increased depreciation limits for passenger automobiles placed in service after Dec. 31, 2017. For the purpose of the depreciation caps, a passenger automobile includes any four-wheeled vehicle manufactured primarily for use on public streets, roads and highways that has an unloaded gross vehicle rating (GVWR) of 6,000 pounds or less (IRC Sec. 280F (d)(5)(A)). The table below shows the increase in depreciation allowed on passenger automobiles under the TCJA.
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|
First Yr. Depreciation |
Later Yrs. Depreciation |
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|
Date Placed in Service |
No Bonus |
Bonus |
Yr. 2 |
Yr. 3 |
Yr. 4 to End |
|
2018 – Cars, Light SUVs, Trucks & Vans (New Law) |
$ 10,000 |
$ 18,000 |
$ 16,000 |
$ 9,600 |
$ 5,760 |
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|
|
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|
2017 – Cars (Prior Law) |
$ 3,160 |
$ 11,160 |
$ 5,100 |
$ 3,050 |
$ 1,875 |
|
2017 – Light SUVs, Trucks & Vans (Prior Law) |
$ 3,560 |
$ 11,560 |
$ 5,700 |
$ 3,350 |
$ 2,075 |
Vehicles with a GVWR greater than 6,000 pounds are not subject to these depreciation limits mentioned. Therefore, in many cases the switch from 50% to 100% bonus depreciation on these heavy vehicles will allow for a full tax write-off at the time of purchase.
To demonstrate how the TCJA like-kind exchange and depreciation provisions will impact your business and leave you with no reason to panic, please consult your Schneider Downs advisor.
