5 ways tax reform will affect businesses in 2018

10:55 AM, Feb 12, 2018
5 ways tax reform will affect businesses in 2018

The Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law in December 2017 and made some of the biggest changes to tax law since the passage of the Internal Revenue Code of 1986. Its sweeping effects won't affect the taxes you're filing this year but be ready for big changes in how you file next year. Here's how the TCJA could affect you.

Businesses will likely have dramatically less tax liability

One of the most significant changes implemented by the TCJA is the reduction of the corporate tax rate.  The maximum corporate tax rate has been reduced from 35 percent to 21 percent. Additionally, the range and size of available corporate tax deductions has expanded. The combination of these two changes begs an important question for most businesses: How many deductions can realistically be absorbed going forward?

Not to be left out, pass-through businesses such as partnerships, S-Corps and Limited Liability Companies who pay taxes at the individual owner level, also received a tax cut from the TCJA. The new law provides a 20% deduction against trade or business income. Top individual tax rates of 37% can be reduced to an effective tax rate of 29.6% with this benefit. Pass-through business owners should consult their financial advisors since this benefit has income and industry-related eligibility requirements.

100 percent expensing will apply to newly purchased assets

Qualified capital equipment purchased and placed into service after Sept. 27, 2017 and before January 1, 2023, is eligible for 100 percent expensing which all business owners can claim. Those who invest in qualified equipment during that time can simply expense 100 percent of the equipment cost in the first year of ownership. This is great news for many equipment-intensive corporations.

However,  Key Equipment Finance  points out, "The benefit of such a write-off has less impact in a 21 percent corporate tax environment . . . therefore some businesses might be unable to absorb all the depreciation benefits available to them." In such a case, leasing equipment using a qualified tax lease could allow them "to monetize otherwise unused depreciation benefits."

Businesses should also note that the temporary increase in expensing allowance also applies to pre-owned equipment purchases. 

 

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Elimination of Alternative Minimum Tax

The repeal of the corporate Alternative Minimum Tax (AMT) gives many organizations something to celebrate. In the past, those paying AMT seemed to automatically benefit from a tax lease equipment acquisition strategy, as capital asset depreciation was an AMT preference item. This meant that equipment depreciation benefits were effectively neutralized and had little value for AMT payers. With AMT’s repeal, now is the time to re-assess all available equipment finance options with your financial advisor.

New limits on deducting net operating losses

In the past, businesses who reported a net operating loss (higher expenses than income for the year), could claim a refund of all or part of their taxes for the previous two years. However, "The TCJA eliminates carrybacks of NOLs — that is, they may only be deducted in current and future years," according to  nolo.com .

In addition, "Taxpayers are allowed to deduct NOLs only up to 80 percent of taxable income. Unused NOL amounts may be carried forward and deducted in any number of future years," explains nolo.com.

Financing continues to offer solutions for business growth

Financing equipment continues to be an intelligent way to support business growth. Leasing allows businesses to enhance cash flow by avoiding large out-of-pocket costs that could interrupt efficient business operations. Business owners also have the flexibility of upgrading equipment as technological advancements occur, rather than feeling obligated to utilize old equipment until it has worn out its usefulness.

In addition, leases do not tie up credit lines used to support normal business operations with long-term capital investments.

To learn more about how the Tax Cuts and Jobs Act of 2017 may affect your equipment acquisition strategy, contact  Key Equipment Finance  today.

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