Expensing of Assets

If the cost of a unit of property doesn’t exceed $2,500 ($5,000 if the business has a certified audited financial statement) the business can take advantage of the de minimis safe harbor election to expense the entire cost without capitalizing and depreciating.

For larger purchases of new assets (other than buildings) including computer software, the expense limit is $1,000,000 beginning in 2018 on investments of no more than $2,500,000. This means that a business can deduct the entire cost of assets without regard to when during the year they are purchased, subject to net income. If there is not enough income to fully deduct in the current year the amount is carried forward until deducted when income is available to offset.

Bonus depreciation is another option if net income is an issue. 100% of the cost of machinery and equipment (new or used) can be taken without regard to net income, also without regard to when placed in service.

Due to a drafting error, commercial real estate qualified improvement property which should have been 15-year property and eligible for bonus depreciation was not written into the statute. Without legislative action, these improvements will still be depreciated over 39 years.

Switch to the Cash Method

To qualify as a “small business” switching to the cash method of accounting (as opposed to accrual), the business gross receipts for the past three years cannot average more than $25 million annually (as opposed to the prior limit of $5 million). Cash basis taxpayers have more flexibility in shifting income and accelerating expenses than accrual basis taxpayers.

Qualified Business Income (QBI)

For taxpayers with pass-through income, the new QBI deduction allows them to a deduction of up to 20% of their QBI subject to phase-out if the taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers.

Deferring income or accelerating deductions could be used to ensure the above limits are not reached, allowing the full benefit of this deduction.

Rental real estate qualifies for this deduction as well!

Meals and Entertainment

All business-related entertainment expenses are no longer deductible. Meals while traveling away from home for business remain 50% deductible. Meals provided on the employer’s premises for the convenience of the employer are now only 50% deductible (previously 100%) through 2025. In 2026, these amounts will become nondeductible.