The Tax Cuts and Jobs Act: It’s Time to Buy Assets for Your Business
The Tax Cuts and Jobs Act (the “New Tax Law”) makes it a great time to buy equipment and businesses (if you structure them as an asset purchase). That is because Congress is giving such a great tax deal on business asset purchases, that even people in Congress, who wrote the New Tax Law, and those at the Treasury and IRS, who interpret and enforce the New Tax Law, are calling it “Bonus” Depreciation! This is such a great Bonus – that Congress could not leave it around forever, and so it will expire in 2023!
This Article is aimed a bit more at the Tax Nerd/Accountant Group – but it’s worth reading if you have a growing business and are looking to increase your market share by expanding through using Bonus Tax provisions!
Why is it such a Bonus deal? It’s a Bonus, because you can deduct your entire purchase this taxable year for “qualified purchases” – through 2023 – as long as they are real assets. (Certain types of intellectual property are even allowed under this new provision, including TV productions, movies and live stage productions. Even used equipment is allowed to be expensed.
Previously, you might have needed to “depreciate” assets purchased for your business over several years – let’s say three years for computer equipment, perhaps much longer for construction equipment. These were what they called MACRS Equipment (Modified Accelerated Cost Recovery System Equipment). Now, if you buy a new crane or other significant piece of work related equipment, you can, as a Bonus pay for it this year.
Congress gave taxpayers this Bonus on purpose – Congress wants taxpayers to spend money on equipment, especially equipment useful for manufacturing and building business, in order to bring and grow more jobs to the United States. Congress was so enthusiastic about this proposal, that they even allow 50% expensing for assets purchased after September 27, 2017 – before the New Tax Law even comes into law. They wanted businesses to go out and buy equipment as soon as they heard about the new tax law!
So, what are some key takeaways of new Sections 168(k) and 179 of the Internal Revenue Code?
If you are going to buy a business this year – buy the assets themselves – and not the business legal entity! You get to fully expense the cost of the new business this year – and not just wait to sell the stock or depreciate it in the future.
As an example, let’s say you run a small trucking company and you decide that you want to but three new trucks to add to your fleet. One of your local competitors has three trucks. You go to your local competitor and you offer to buy her company. If you buy the stock of her corporation or LLC for $300, then you will hold the equity for $300 and you will not be able to “expense” the purchase until you sell the stock - although you can depreciate the underlying assets – but based on the tax basis at the time of the purchase. So if the trucks are used, so they only have a tax basis of $30 each, then you only get a deduction based on their lower tax basis, and you may not even be able to take advantage of the “Bonus” depreciation (as you didn’t buy them directly this year – but rather got them through her business)!
If, on the other hand, you simply buy each of the used trucks for $100, you get the Bonus deduction of the full $300 this year for each of the trucks and business assets that you purchased! You may also (see my note at the end) get to count the $300 value of the trucks for purposes of your 199A pass-through deduction (assuming you operate through an LLC/S-Corp or are a sole proprietorship – see the note at the end of this Article).
You may also use a “Section 338(h) election” to treat the entire business purchase as a Bonus Asset Purchase, so the entire purchase will be deductible. It will take both parties to agree to this type of special asset purchase and please contact a tax attorney to go through the requirements for using this election.
Trading Equipment and a Tax Benefit?!? One other thing to think about as you look at your capital budget for 2018 is the fact that you may be able to “trade” assets and get a Bonus if you structure it correctly. If you and an unrelated business want to buy assets from each other – let’s say you like her forklift and she likes your small crane. Both are worth $100. You might, in the past, simply “trade” the assets and call it “even” – no tax break here! Under the New Tax Law, you can buy her forklift for $100 while she can buy your small crane for $100! Both of you get to deduct $100 of “Bonus” depreciation this year! There are limitations on this and you need to structure your way around the rules – but this is a great way to bring much needed used equipment into your business, get equipment that you don’t need off your books (and off your maintenance schedules/property), and get a tax deduction! Bonus!
- For those in the real estate business – you can expense many more improvements to property such as HVAC and roofs! Contact me if you want to know more about this Bonus!
- And No Bonus! The SUV limitation is still in place – so for all of those who use your Leather Trimmed Range Rovers for “business purposes” – you are limited to $25,000 a year in deductions – but the amount will now be indexed with inflation.
- BTW – many heavier pick-up trucks useful in your business - and other vehicles can be expensed along with the leather trim – and possibly the “gun rack” add-ons!
Finally, it is still a bit of an open question as to whether or not you can count your Bonus equipment as part of your “capital” for purposes of the Section 199A 20% LLC/S-Corp/Proprietorship deduction. Currently there are no regulations on this point and the US Treasury and the IRS have only said that they are “thinking about this.” It took at least 24 months for regulations to start being issued by the Treasury after the 1986 tax law and there are a lot of holes in the New Tax Law that need to be patched up.
I would recommend moving forward before negative guidance gets issued! 2018 is the year to buy that business/heavy equipment/data farm or other real asset and possibly take some double tax bonuses! And by the way – if you think this is just a loophole -think again that double tax Bonus is what Congress intended – they want real businesses to buy real assets, put them into service, stimulate the economy and create jobs!
Taylor | Legal, as a solo attorney, with a Masters in Tax Law from NYU and years of “Big Law/Big Corporation” experience, can give your small business and start-up a unique perspective that incorporates tax and corporate legal analysis, at the right price point to enable your success.