Trying to crack the tax code for small businesses is becoming a little clearer as a result of the Tax Cuts and Jobs Act, which takes effect starting with your 2018 return and beyond, but the changes are so significant, it’s important to understand the bill and how it will impact your small business. Big business in the form of C Corps got an amazing break with the bill. One of the big tenets of the Tax Cuts and Jobs Act is the major reduction in the C Corporation tax rate, which was slashed from 35 percent to 21 percent. A percentage of small businesses do incorporate as C Corps, so they too will gain that tax cut.
A recent survey by the NFIB reported that 61% of small businesses claimed capital outlay, with 43% spending on equipment, 27% on vehicles, and 16% on improved or expanded facilities. They can credit the Tax Cuts and Jobs Act for this. It makes it easier than ever to write off the cost of buying equipment or making certain improvements now, rather than depreciating the cost over a number of years. Let’s take a high-level look at how to write off equipment and capital improvements under the new tax code. In addition, you can use any of these options whether you pay cash or finance the purchase in whole or in part.
First Year Expensing: You can expense the cost of certain qualified real property now. Check Section 179 for all items, but many additional items have been added to the list of what is a qualified improvement, thus allowing you to take the expense now rather than depreciate over a number of forward years. Despite these generous dollar limits, expensing continues to be limited to taxable income. Thus, if a C Corp buys $800,000 of capital equipment but only has $350,000 of taxable income, the expensing deduction is limited to $350,000, although the excess amount can be carried forward.
Bonus Depreciation: For 2018, bonus depreciation applies to 100% of the cost of qualified property, whether new or pre-owned, and there’s no dollar limit. This ostensibly allows you to write off the cost of the eligible asset in the year it was purchased and first used.
De Minimis Safe Harbor: A deduction is taken in the year in which certain materials and supplies are paid for or consumed, whichever is later. For example, a 25 room motel buys 25 small refrigerators at a cost of $40 per refrigerator, and they are placed in each room. The business can opt to deduct $1,000 as non-incidental materials and supplies. The refrigerators aren’t added as an asset to the balance sheet.
The bottom line is this is a good time to think about the tax changes and your business structure. Keep an eye out for when the IRS releases additional guidance. If needed, speak with a tax advisor about your specific situation. And lastly, one of the key reasons to form an LLC or Corporation has always been the ability to minimize the personal liability of business owners from things that happen in the business. This still holds true. The most important reason to form a business entity isn’t necessarily to save a little on taxes, but to protect your personal assets for years to come.