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•Corporate rate drops from 35% to 21% effective 1/1/18
•Fiscal year taxpayers have a pro-rated rate (based on days) for the remainder of their fiscal year
= approx. 31.55%
Effect on existing portfolios
–Loans –After-tax return on equity (AT ROE) will increase because income is taxed less
–True (tax) leases –AT ROE will likely increase because most accelerated tax depreciation claimed at 35% while rental income taxed at21%
–Tax-exempts –AT ROE may decrease if there are any expenses deducted against tax-exempt income because now deducted at21%
100% Bonus Depreciation
•The Act allows tax payers to expense the full cost of new and used equipment placed in service after September 27,2017 and before January 1,2023 •Thereafter, the immediate deduction falls by 20% per year for property placed in service on or after January 1, 2023 and before January 1, 2027 (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and no bonus depreciation in 2027 and thereafter)
•Certain property with longer production periods and certain aircraft are entitled to an extra year with respect to each deadline above
•Many states are unlikely to conform to federal bonus depreciation regime for purposes of state tax return rules
100% Bonus Depreciation – Special Rules
•Applies to new and used property so long as the property was not previously used by its owner or a related party
•An equipment user can sell equipment it has been using for years to a lessor and lease it back, and the lessor can claim 100% bonus depreciation
•Lease syndications –Congress may have inadvertently retained prior language regarding lease syndications occurring within three months of the placed in service date. ELFA is planning to seek guidance to confirm that this vestigial provision is not applicable.
•ELFA is also working on a guidance request confirming that a lessee purchasing equipment at the end of the lease is eligible for 100% bonus depreciation.
•Three-month sale-leaseback rule was eliminated because it is no longer needed as used property is generally qualified
•100% bonus depreciation is not available if there was a “binding written contract” to acquire the properties before September 28, 2017 –need to carefully analyze
•The “Pickle” tax-exempt use property rules still apply –no bonus or other accelerated depreciation if leased to government, non-profit or foreign person or if used outside the United States
Limit on Interest Deductibility
•For tax years beginning after Dec. 31, 2017, the Act imposes a new limit on nearly all net “business interest”—Net Business Interest Expense Deduction = “business interest expense” (i.e., interest paid or accrued on indebtedness properly allocable to a trade or business) “business interest income”
•There is a disallowance of a deduction for net interest expense in excess of 30% of the business’s “adjusted taxable income” (ATI)—For purposes of this limitation, ATI is determined in a manner similar (but not identical) to EBITDA for taxable years 2018 through 2021
—Beginning in 2022, ATI is determined in a manner similar to EBIT (i.e., depreciation and amortization reduce the adjusted taxable income limit the 30% is applied to)
•Disallowed Interest Deductions—carried forward indefinitely and treated as interest in later taxable years
• Leasing Opportunities
• Taxpayers running into this limit will favor leasing over borrowing, as rent paid under a true lease is not interest subject to the limitation
• For lessors at risk;
– may need to finance using leases in lieu of debtor
– some structuring may be available with “Section 467 loans” to create interest income to offset interest expenses
• Taxpayers Excluded from Interest Limitation:
• Small businesses: average annual gross receipts for the 3-year period ending with the prior year not in excess of $25MM
• Regulated public utilities and electric cooperatives
• Costs of floor plan financing for motor vehicle inventory are excluded from the limitation
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. As always please consult your tax expert! We aren’t tax lawyers; we just know semitrailers.
What is the Section 179 Deduction?
Most people think the Section 179 deduction is some mysterious or complicated tax code. It really isn’t, as you will see below.
Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.
Several years ago, Section 179 was often referred to as the “SUV Tax Loophole” or the “Hummer Deduction” because many businesses have used this tax code to write-off the purchase of qualifying vehicles at the time (like SUV’s and Hummers). But that particular benefit of Section 179 has been severely reduced in recent years (see ‘Vehicles & Section 179‘ for current limits on business vehicles.)
However, despite the SUV deduction lessened, Section 179 is more beneficial to small businesses than ever. Today, Section 179 is one of the few government incentives available to small businesses, and has been included in many of the recent Stimulus Acts and Congressional Tax Bills. Although large businesses also benefit from Section 179 or Bonus Depreciation, the original target of this legislation was much needed tax relief for small businesses – and millions of small businesses are actually taking action and getting real benefits.
Here’s How Section 179 works:
In years past, when your business bought qualifying equipment, it typically wrote it off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example).
Now, while it’s true that this is better than no write-off at all, most business owners would really prefer to write off the entire equipment purchase price for the year they buy it.
And that’s exactly what Section 179 does – it allows your business to write off the entire purchase price of qualifying equipment for the current tax year.
This has made a big difference for many companies (and the economy in general.) Businesses have used Section 179 to purchase needed equipment right now, instead of waiting. For most small businesses, the entire cost of qualifying equipment can be written-off on the 2019 tax return (up to $1,000,000).
Limits of Section 179
Section 179 does come with limits – there are caps to the total amount written off ($1,000,000 for 2019), and limits to the total amount of the equipment purchased ($2,500,000 in 2019). The deduction begins to phase out on a dollar-for-dollar basis after $2,500,000 is spent by a given business (thus, the entire deduction goes away once $3,500,000 in purchases is reached), so this makes it a true small and medium-sized business deduction.
Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease new or used business equipment during tax year 2019 should qualify for the Section 179 Deduction (assuming they spend less than $3,500,000).
For basic guidelines on what property is covered under the Section 179 tax code, please refer to this list of qualifying equipment. Also, to qualify for the Section 179 Deduction, the equipment and/or software purchased or financed must be placed into service between January 1, 2019 and December 31, 2019.
What’s the difference between Section 179 and Bonus Depreciation?
Bonus depreciation is offered some years, and some years it isn’t. Right now in 2019, it’s being offered at 100%.
The most important difference is both new and used equipment qualify for the Section 179 Deduction (as long as the used equipment is “new to you”), while Bonus Depreciation has only covered new equipment only until the most recent tax law passed. In a switch from recent years, the bonus depreciation now includes used equipment.
Bonus Depreciation is useful to very large businesses spending more than the Section 179 Spending Cap (currently $2,500,000) on new capital equipment. Also, businesses with a net loss are still qualified to deduct some of the cost of new equipment and carry-forward the loss.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business had no taxable profit, because the unprofitable business is allowed to carry the loss forward to future years.
Section 179’s “More Than 50 Percent Business-Use” Requirement
The equipment, vehicle(s), and/or software must be used for business purposes more than 50% of the time to qualify for the Section 179 Deduction. Simply multiply the cost of the equipment, vehicle(s), and/or software by the percentage of business-use to arrive at the monetary amount eligible for Section 179.
As always please consult your tax expert! We aren’t tax lawyers; we just know semitrailers. Call ILoca at 855-707-2909 or email firstname.lastname@example.org for more info!
This publication is for general informational purposes only, and is not intended as specific or personalized tax recommendations or tax advice. The application and effect of certain laws can vary significantly based on specific facts, and professional advice of any nature should be sought only from appropriate professional advisors. This document is not intended, and shall not be deemed, to constitute legal, tax, accounting, or other professional advice.