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.
2018 Changes
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 Sept 27, 2017, can qualify for 100% deduction under this tax treatment, potentially creating cash-flow benefits. Additionally, bonus depreciation can now be claimed for old equipment. The provisions are in full effect (100% deduction) through Dec. 31, 2022, and will phase out through Dec. 31, 2026.
Doubling Deductions
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 includes 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.
Other Considerations
With the tax reform, we are at the intersection of several beneficial points in the economic cycle. First, interest rates are low right now. The Fed has signaled its intent to raise rates three times in 2018. While expectations are for continued rate increases in 2019. As these increases come into the marker, borrowing costs for operating lines of credit and other variable rate financing tools will increase.
Furthermore, we also had a period of low inflation for the past couple of years. If the act has its desired effect of increasing economic activity, manufacturers might see an opportunity to raise prices. This is also true for gas pumps with strong demand forecast for EMV pump upgrades between now and the EMV liability shift in 2020.
Lastly, the third consideration is rising labor costs. With a marker that is considered full employment in 2017, any GDP growth results in wage pressure. Increases in wages will move into the economy in the form of higher technician costs for installing equipment and prices.
Combining the 2017 Tax Act benefits with today’s low-inflation and low-interest-rate may make 2018 the year to upgrade your sites.
However, please consult your tax professional for advice related to your specific situation.
By: Richard Browne
Vice President of Marketing for Patriot Capital
December 28, 2017