MoldMaking Technology

AUG 2018

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46 MoldMaking Technology —— AUGUST 2018 THE BOTTOM The Impact of Tax Reform on Capital Expenditures By Michael J. Devereux II, CPA, CMP The Tax Cuts and Jobs Act (the Act) impacts how mold build- ers account for income and compute tax liabilities in 2018 and beyond. The Act introduces dozens of new provisions and sig- nificantly modifies or eliminates others. Many of the provisions are taxpayer-friendly, including how mold builders account for capital expenditures. Those expen- ditures include the purchase of equipment, machinery, tool- ing, plants and buildings and even a parking lot. The following explains how the new law impacts the purchase of capital assets. Bonus Depreciation Mold builders are allowed an additional bonus-depreciation deduction related to qualified property in the year that they place the qualified property into service. Bonus depreciation has always been temporary in nature but has been part of the tax code since 2001. Since then, mold shops have been entitled to a bonus, accelerated depreciation for qualified property, ranging anywhere from 30 to 100 percent of the asset's cost basis. Before the Act, the bonus depreciation amount was 50 percent of the adjusted basis for assets that were placed in ser- vice before 2018, and it would phase out as it decreases to 40 percent in 2018 and 30 percent in 2019. The bonus depreciation is an acceleration of depreciation. For example, if a mold shop buys a new lathe, then the lathe qualifies as a seven-year Modified Accelerated Cost Recovery System (MACRS) property for $250,000 on September 1, 2017. The shop will claim a bonus depreciation deduction of $125,000, with the remaining $125,000 of the tax basis recovered over the life of the asset. MACRS is the current tax-depreciation system in the United States, under which the capitalized cost (or basis) of tangible property is recovered over a specified life by annual deductions for depreciation. Bonus depreciation for the eligible property is automatic. Mold builders can elect out of the bonus depreciation for any class-life of property. The mold builder makes the election con- cerning a class-life of property and not for a particular asset. For example, a mold builder that purchased both a five-year MACRS property and seven-year MACRS property in a tax year may choose to elect out of bonus depreciation for the five-year MACRS property but claim the bonus depreciation for the seven-year property. Qualified property that is eligible for bonus depreciation includes tangible personal property with a MACRS asset life of 20 years or fewer, certain off-the-shelf computer software and qualified improvement property. Also, the property's original use has to have commenced with the taxpayer. That is, the property has to have been new under the old law. The Act retroactively increased the bonus-depreciation percentage to 100 percent for property placed in service after September 27, 2017 and through December 31, 2022. Beginning in 2023, the bonus-depreciation percentage is phased-down as follows: • 80 percent for property that is placed in service during calendar-year 2023 • 60 percent for property that is placed in service during calendar-year 2024 • 40 percent for property that is placed in service during calendar-year 2025 • 20 percent for property that is placed in service during calendar-year 2026 Mold builders may elect to claim the 50-percent bonus depre- ciation instead of the 100-percent bonus depreciation for quali- fied property that they place in service during the first tax year ending after September 27, 2017 (which is the calendar year 2017 for most businesses). Also, the Act modifies the definition of qualified property to include used property that was not used by the taxpayer before it was acquired by the taxpayer. That is to say, used machinery, equipment and other qualifying property may now qualify for bonus depreciation as long as the mold builder has not used or leased the property before purchase. This is the first time that tax law has included used pieces of equipment in what it defines as qualified property since the introduction of bonus depreciation in 2001. The provision is cer- tain to impact the merger and acquisition (M&A) market, as firms structure numerous deals as asset sales for federal income tax purposes. That is, if a company is purchasing all of the assets of another company, the buyer may be able to write off 100 percent of the purchase price allocable to the qualifying property. This

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