New Jobs Act Changes Depreciation Rules

The American Jobs Creation Act of 2004 (2004 Jobs Act) made some significant changes to the methods businesses use to depreciate certain assets. Except for the potential difference in depreciating SUVs, the Act's provisions are generally taxpayer friendly.

Extension of Liberalized Section 179 Deduction Rules. The new law extends the current maximum Section 179 deduction of $100,000, indexed for inflation ($102,000 in 2004), for two additional years-through tax years beginning before 2008. For tax years beginning in 2008 and beyond, the maximum deduction is scheduled to fall back to only $25,000. For tax years beginning before 2008, the new law also extends the other favorable Section 179 changes made by the Jobs and Growth Tax Relief Reconciliation Act of 2003 [e.g., the ability to claim the deduction for off-the-shelf software costs, the $400,000 inflation-adjusted ($410,000 in 2004) threshold for the deduction phase-out rule, and so on]. These taxpayer-friendly rules were previously scheduled to vanish for tax years beginning in 2006 and beyond.

Reduced Section 179 Deduction for SUVs. The new law places a $25,000 limit on the Section 179 deduction for "heavy" SUVs with gross vehicle weight ratings of 14,000 pounds or less. Before this change, SUVs with gross vehicle weight ratings of more than 6,000 pounds could qualify for the full $100,000 deduction, adjusted for inflation ($102,000 in 2004). This potentially unfavorable new rule affects SUVs placed in service after October 22, 2004. However, it won't apply to any vehicle that: (1) is designed to seat more than nine passengers behind the driver's seat (e.g., a hotel shuttle van); (2) has an open cargo area or covered box not readily accessible from the passenger compartment of at least six feet in length (e.g., many pickups with full-size cargo beds); or (3) has an integral enclosure that fully encloses the driver compartment and load carrying device, does not have seating behind the driver's seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield (e.g., a delivery van).

Vehicles that fall under these exceptions still qualify for the full Section 179 allowance, as long as they have gross vehicle weight ratings in excess of 6,000 pounds. Exceptions are also provided for ambulances, hearses, and vehicles used directly in the trade or business of transporting passengers or property for compensation or hire.

15-year Depreciation Recovery Period for Leasehold Improvements. Under current law, nonresidential leasehold improvements are generally required to be depreciated using the straight-line method over 39 years, well beyond the useful life of such improvements. To correct this imbalance, the new law establishes a statutory 15-year recovery period for qualified nonresidential leasehold improvement property placed in service before 2006. The straight-line method continues to apply. This recovery period change is effective for property placed in service after October 22, 2004, and before 2006.

15-year Depreciation Recovery Period for Restaurant Improvements. As with leasehold improvements, current law generally requires restaurant improvements to be depreciated over 39 years—a period well beyond the actual life of such improvements given their heavy commercial use. Therefore, the new law provides a statutory 15-year recovery period for qualified restaurant property placed in service after October 22, 2004, and before 2006. The straight-line depreciation method must be used.