2018 Tax Benefits for Businesses
Whether you’re a small business owner or part of a large, multinational corporation, the revised 2018 tax benefits has likely become the center of many conversations and strategy sessions. Many of us know the big picture of how the new tax bill slashed corporate tax rates from 35 percent to 21 percent. This drastic cut will free up capital and allow businesses to invest in new markets, hire staff and make equipment purchases they may have been putting off.
That’s the 50,000-foot view.
For a closer look at how your business can take advantage of the 2018 tax benefits, let’s dive in and have a look at three of the most significant changes to the new tax code, the Tax Cuts and Jobs Act, and how these changes may specifically benefit your equipment-purchasing decisions.
You may be entitled to claim a larger deduction.
The Tax Cuts and Jobs Act (H.R.1) has several benefits that specifically target businesses, including the increase of the maximum deduction allowed under Section 179. If you’re a business owner, you know and love Section 179. This provision allows businesses to deduct a substantial amount of the purchase cost on qualified business property. In 2017, businesses could write-off up to $500,000, subject to a dollar-for-dollar bonus depreciation for every dollar spent up to $2 million. Under the new tax legislation, businesses can deduct twice that amount, or $1 million in qualifying capital equipment and retail software. This is subject to the same dollar-for-dollar bonus, but now begins when spending goes over $2,500,000. Raising the total amount that can be deducted and the maximum amount a business can spend on equipment, while still qualifying for this deduction, will make 2018 a great year for large equipment acquisitions.
New opportunities for pass-through entities.
Before the Tax Cuts and Jobs Act was enacted, pass-through entities such as limited liability corporations (LLCs), sole proprietors and S corporations, which make up a significant portion of U.S. businesses, were effectively taxed at an individual rate. The new tax legislation puts in place an additional deduction of up to 20 percent on income for pass-through entities, allowing these entities to be taxed at a rate that is similar to the new corporate tax rate of 21 percent. This deduction is subject to certain restrictions and only applies to qualified business income. This additional deduction
The bonus depreciation.
One of the most important tax breaks businesses would take advantage of before the Tax Cuts and Jobs Act was deducting a percentage of the cost of qualifying assets as “bonus depreciation.” The assets many business owners were most eager to claim as deductions included computer software and property that had a depreciation life of 20 years or less. This previous rate was 50 percent. But now, to the delight of businesses everywhere, it has been raised to 100 percent. This is one of the most substantial changes in the H.R.1 act and allows businesses to take an immediate deduction on eligible business property, including used business property, which was previously disqualified. You’ll want to take advantage of bonus depreciation within the next five years. Starting in 2023, the bonus depreciation will begin to be phased out.
Months before the tax bill reached the floor, politicians said they wanted a tax code that was so simple, people could do their taxes on a postcard. Needless to say, the 500-page bill turned out to be slightly more complicated than some may have hoped for.
The point here is, tax law is complicated! Knowing the basics of these new 2018 tax benefits can help you to plan for those equipment purchases you’ve been putting off. Be sure to meet with your accounting team to fully understand all the details of the new tax code and what it means for your business. More information about 2018 tax benefits for businesses can be found on the congress.gov website.
Section 179 Depreciation Updates for 2018-2019
Section 179 was reinstated by the federal government and signed into law December 18, 2015. This bonus depreciation option was part of the PATH Act, or Protecting Americans from Tax Hikes Act of 2015. As part of the PATH Act, Section 179 deduction was expanded to $500,000 annually, with a maximum bonus depreciation of 50 percent, for equipment put into the field until December 31, 2017.
Starting January 1, 2018, bonus depreciation will begin scaling back due to the PATH Act. Businesses with be able to deduct a 40 percent bonus during 2018. Then, resolving to 30 percent bonus in 2019. The PATH Act states that most types of business equipment, including software and technology, qualify for Section 179 depreciation the year that the equipment was put into service.
It’s important that business owners and senior management keep in mind that the current PATH Act law states that after 2019, the bonus depreciation will be reversed to zero percent. This ruling may change if the federal government takes the law to vote and updates it, during the 2017-2019 legislative seasons.
You may contact your local representation to discuss the law, or contact the IRS to voice your opinions of further reforms to the law:
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2017–28) Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Visit IRS.gov for more information.
What does this all mean, without having to speak in accounting terms?
The key points of Section 179 depreciation stated in the PATH Act of 2015 are that businesses can deduct up to $500,000, plus bonus depreciation at a rate of 50 percent of the remaining cost of the equipment, for the 2017 tax season.
During 2018, businesses will be able to deduct a bonus rate of 40 percent. For the 2019 tax year, businesses will be able to deduct a bonus rate of 30 percent. Finally, the PATH Act will be phased-out during 2020, unless another tax law is passed by the federal government.
Can I Finance or Lease and Still Qualify for Section 179?
Business equipment financed or leased still qualifies for Section 179. The tax law is still the same, even if you’re making payments on equipment for several years. The equipment needs to be in service and must be for business purposes to qualify for Section 179. Advance Acceptance advises all customers and business partners to check with their accounting team, controller or tax resource about any specifics related to their business or industry.