ATLANTA -- With the 2017 Tax Reform Act now the law of the land, we have fresh clarity on how investing in capital goods will be handled. In addition to lower tax rates for many companies, the opportunities to capture immediate benefits from investment in new equipment have significantly increased in 2018.
Key to that insight is the concept of bonus depreciation. Bonus depreciation originated during the economic crisis as an incentive for businesses to invest in new equipment by allowing depreciation deductions to be partially or fully captured in the tax year of purchase, rather than over the useful life of the equipment. With the 2017 tax reform, these incentives have been expanded. Here’s how:
The most significant changes in bonus depreciation are the removal of a previous $2 million cap and a 50% deduction allowance. With the new tax bill, most equipment placed into service after Sept. 27, 2017, can qualify for 100% deduction under this tax treatment, potentially creating cash-flow benefits. Additionally, bonus depreciation may now be claimed for used equipment. The provisions are in full effect (100% deduction) through Dec. 31, 2022, and are scheduled to phase out through Dec. 31, 2026.
In the 2018 tax year, a permanent increase in the annual deduction from $500,000 to $1 million will take effect. Section 179 covers both new and used equipment, including most fueling and convenience-store equipment. Section 179-eligible equipment has been expanded to include improvements to nonresidential property (HVAC, roofs, etc). Additionally, the maximum eligible amount of $1 million will increase based on an inflation index starting in 2019.
With the tax reform, we are at the intersection of several beneficial points in the economic cycle. First, interest rates are still low compared to historic norms. The Fed has signaled its intent to raise rates three times in 2018, and expectations are for continued rate increases in 2019. As these increases come into the market, borrowing costs for operating lines of credit and other variable rate financing tools will increase.
We have also had a period of low inflation for the past couple of years. If the tax act has its desired effect of increasing economic activity, it’s likely that manufacturers will see an opportunity to raise prices based on this stronger demand. This may be especially true for gas pumps, with very strong demand forecast for EMV pump upgrades between now and the EMV liability shift in 2020.
The third consideration is rising labor costs. With a market that was generally considered at or near full employment in 2017, any GDP growth will result in pressure on wages. Increases in wages will move into the economy in the form of higher technician costs for installing new equipment and higher prices for equipment.
Combining the 2017 Tax Reform Act benefits with today’s low-inflation and low-interest-rate environment may make 2018 a good time to invest in upgrading your retail sites.
Please consult your tax professional for advice related to your specific situation. Patriot Capital does not provide tax or accounting advice.
Richard Browne is vice president of marketing for Patriot Capital. Contact him at [email protected].
The opinions expressed in this article are those of the author.