We know. Taxes aren’t the most thrilling topic, but we think understanding the Tax Cuts and Job Act will lead to some sensational savings for you. We’ve compiled the highlights and we’ll try to make it as painless as possible!
In December of 2017, President Trump signed into law, the Tax Cuts and Job Act (TCJA), taking effect in January of 2018. This bill marked the largest tax code overhaul in over three decades. With an election on the horizon, and potential for big changes for businesses and individuals, we wanted to break down what this Act means for your company’s wallet and how to make the most of it.
What new benefits did the Tax Cuts and Job Act offer businesses?
One way the TJCA influenced business purchases, is through an increase in the bonus depreciation percentage. Bonus depreciation is a tax incentive that allows a business to immediately deduct a large percentage of the purchase of eligible assets. It is different than depreciation, which means to write off the cost of an asset over its useful life (the number of years that asset will be used in business.) The TJCA increased the bonus depreciation from 50% to 100%. No limit here either! This means, as a business, you may immediately write off up to 100% of eligible property purchased after September 27, 2017.
What kind of purchases are included?
Qualified property will have a useful life of 20 years or less and will generally fall into one of these categories:
Machinery (Including qualified used equipment. More on that later.)
Additionally, the taxpayer may opt to include the following improvements made to “non-residential real property” (a commercial building), IF the improvement is made after the building is put into service (opened its doors for business) and placed in service in the taxable years beginning after December 31, 2017.
- Any improvement to a building’s interior
- Fire Protection Systems
- Alarm Systems
- Security Systems
Here is what is NOT included in the definition of eligible improvements to a commercial building:
- Enlargement of the building
- Any elevator or escalator
- Internal Structural Framework of the build
Okay, so we mentioned earlier in this post that one of the eligible purchases includes used equipment. Used equipment also qualifies for 100% bonus depreciation, but there are some guidelines that need to be followed. Among these factors, is that the taxpayer may not acquire the property from a related party or a component member of a controlled group, in other words don’t try to trick Uncle Sam by buying and selling from yourself to get tax credits. It won’t end well! Additional rules apply, and we’ve linked more information at the bottom of this post.
Okay, so with all of that in mind, let’s take a look at an example to explain how one of these tax credits could work.
Let’s say you are a Type C corporation and federal income tax is at a rate of 25%.
Total Annual Profit: $4,500,000 @ 25% Federal Tax would be $1,125,000 owed to the Federal government.
Let’s say though, you make an equipment purchase of $3,000,000. Assuming that you have met all the criteria, you are now eligible for a bonus depreciation of 3,000,000. You may deduct that purchase amount from your total annual profit, giving you a remaining taxable profit of $1,500,000 at 25% federal income tax rate. Your taxes owed now become $375,000 giving you a year one savings of $750,000!
Okay, so if word problems aren’t your favorite here’s a quick breakdown of all this.