ATLANTA -- Fuel retailers, jobbers and convenience-store owners need to consider taking action within the next six weeks to take advantage of potentially significant tax savings in the 2016 tax year. Capturing these tax savings via Section 179 of the tax code will improve cash flow in 2017, providing funds that can be invested to help grow your business.
Using the two tax strategies outlined below can pull cash into your business that would otherwise be unavailable for 5 to 7 years.
What is Section 179?
Section 179 is a tax benefit that allows small businesses to deduct up to $500,000 in capital investments in the same year as the equipment is placed into service, rather than depreciating it slowly over its useful life. The benefit was made a permanent part of the tax code in December 2015.
It applies to either new or used capital equipment.
However, Section 179 requires that equipment be placed into service by Dec. 31 of the current year. As a result, planning is essential in the case of capital equipment such as fuel dispensers.
If equipment is not ordered until October, there is a risk it will not be installed in the current year when lead times for it to be built, shipped and installed are considered.
How Does Section 179 Work?
Let’s consider two scenarios for a retailer in a 35% marginal tax bracket.
Assume four new gas pumps cost $70,000 installed. Taking standard depreciation over 7 years would result in an annual deduction of $10,000. At 35%, this depreciation yields a tax savings of $3,500 in 2016 taxes due.
Using Section 179 bonus depreciation, this same transaction could result in a $70,000 deduction in the current year, yielding a $24,500 tax savings.
The difference of $21,000 in tax savings is cash that can be used to make additional investments in your business.
What is Bonus Depreciation?
An additional tax strategy for c-stores and other small businesses is bonus depreciation. This provision applies to small businesses spending between $500,000 and $2 million on new equipment. In this range, 50% of the capital spent can be deducted in the current year.
For spending between $2 million and $2.5 million, the amount of the bonus depreciation is reduced proportionately.
The 50% deduction allowed under bonus depreciation reduces to 40% in 2018 and 30% in 2019, making it important to plan capital spending to maximize the benefits.
Here’s an example that can help illustrate the impact of the Section 179 and bonus depreciation for a fuel marketer spending $600,000 in 2016:
** assumes 7 year depreciation
In this example, the marketer fully deducts the first $500,000 at 100%, plus 50% of the next $100,000. This $550,000 deduction leaves the book value of the asset at $50,000 ($600,000 - $500,000 - $50,000). This $50,000 can then be deducted over the 7-year asset life, providing an additional $7,145 deduction.
These deductions provide $195,000 is tax savings compared to only $30,000 in the first year if traditional depreciation methods are used, a $165,000 cash-flow benefit.
What Equipment Qualifies for Section 179?
The IRS defines the eligible depreciation amount, or cost basis, as including the cost of the asset, which can include sales tax, freight and installation costs. Some of the ways businesses can use the 2016 Section 179 renewal include:
- EMV(Europay Mastercard Visa)equipment upgrades, including EMV pumps, EMV retrofit kits and POS upgrades
- In-store equipment such as beer caves or fixtures
- Energy-efficiency improvements, including LED lighting and HVAC equipment
- Underground-storage-tank upgrades
And if a business leases, rather than owns, its building, it can deduct limited structural changes—things like interior walls and doors—under Section 179 provisions.
Combining these forms of accelerated depreciation can create positive cash-flow. If the equipment is purchased using equipment financing, it is possible that the transaction can provide a positive cash flow for more than a year.
I recommend that businesses consult with their tax professional to ensure that they are maximizing the available tax benefits from Section 179 and bonus depreciation.
Richard Browne is vice president, marketing for Patriot Capital Corp. Contact him at[email protected]. Based in Atlanta, Patriot Capital specializes in enabling entrepreneurs to succeed by providing hassle-free equipment financing to retailers in the convenience-store and retail-petroleum fueling industries. Follow Patriot Capital on Twitter @PatriotCapital. Patriot Capital is powered by State Bank and Trust.