ATLANTA — Labor Day may have just passed, but it is not too early to think about April. Optimizing your taxes requires some advanced planning that can yield big savings. With changes to the tax code in the wind, 2017 may be the last time some deductions are available or are as valuable. Two tax savings strategies that can help you reduce your 2017 taxes are Section 179 and bonus depreciation.
Both Section 179 and bonus depreciation are forms of “accelerated depreciation.” These strategies allow you to recoup all or a significant portion of an asset’s depreciation in the first tax year the equipment is put into use.
To take advantage of these deductions, equipment must be installed and in service by Dec. 31, 2017. With current lead times on some equipment reaching six weeks, plus additional lead times for scheduling installation, waiting much longer may put these tax savings out of reach for 2017.
Let’s consider a convenience store that upgrades gas pumps, does canopy and brand-imaging work and installs new beer caves at a total cost of $350,000. Normally, this business may depreciate this investment over something like seven years, getting an annual tax deduction of $50,000. Under Section 179, a business may deduct up to $500,000 of capital equipment purchases in year one. In this case, the business could deduct all $350,000 in 2017. If the business is in a 30% tax bracket, this would generate $105,000 in both tax savings and incremental cash flow.
If this same site also undertook a tank upgrade and new price signs, the $350,000 spend could become $650,000. Bonus depreciation kicks in above $500,000 and allows c-store business owners to deduct 50% of the amount between $500,000 and $2 million as first-year depreciation. In this example, the retailer could deduct $500,000 at 100%, and $150,000 at 50%, for a total 2017 deduction of $575,000. At a 30% tax rate, this would yield $172,000 of tax and cash-flow benefits.
It is important to note a couple of things as you consider how to use these strategies for your business:
- The 50% deduction for bonus depreciation falls to 40% in 2018 and 30% in 2019 under the current tax act. If the proposed changes by the Trump administration to the tax act result in lower corporate taxes, the value of depreciation may be lower, resulting in the after-tax cost of equipment increasing by more than 25%.
- At this time, it’s unclear if Section 179 or bonus depreciation will survive any changes to the tax act. It is possible that tax-code revisions will eliminate these incentives to boost near-term tax revenue to help offset the effect of lower corporate tax rates.
The Wall Street Journal recently pointed out that “most midsize and smaller firms pay much higher rates” than larger corporations. Section 179 and bonus depreciation are incentives designed to benefit smaller companies. Consider using them while there’s still time this year, and while they are still available.
Chris Santy is president of Patriot Capital. Reach him at firstname.lastname@example.org.
Patriot Capital, a division of State Bank and Trust Co., specializes in enabling entrepreneurs to succeed by providing hassle-free equipment financing in the retail and commercial-fueling verticals and other retail and manufacturing industries.
Working with its customers to enable them to optimize their financing and capital structures, Patriot Capital is the leading provider of capital equipment financing and leasing to NACS (National Association of Convenience Stores) and SIGMA (Society of Independent Gasoline Marketers of America) members.