Leveraging the tax law

Reduce Your Tax Bill Through Capital Investment

The Tax Cuts and Jobs Act of 2017, which went into effect on Jan. 1, 2018, enhances tax-deduction strategies for companies considering capital investments. Companies can take advantage of the law’s changes impacting both bonus depreciation and the application of Section 179 of the Internal Revenue Code.

If you like the idea of whittling down your company’s tax bill and you have equipment purchases in mind, there’s still time before year-end to take advantage of enhanced tax-deduction opportunities. But the clock is ticking.

Bonus DepreciationThe Tax Cuts and Jobs Act sweetened two tax-deduction strategies related to capital equipment acquisition transactions.

One significant change relates to bonus depreciation rules. The tax law increases the allowable bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.

In other words, until this provision sunsets, companies can write off the full cost of qualified capital assets as an expense in the year they are acquired and placed into service. What’s more, there are no limitations on the value of eligible equipment that qualifies for a 100% deduction for the taxpayer – a significant difference in comparison with Section 179, which we’ll discuss below.

Generally, property with a depreciable recovery period of 20 years or less is eligible for tax bonus depreciation. Significantly, the tax law also expands eligible property to include used property.

The Tax Cuts and Jobs Act sweetened two tax-deduction strategies related to capital equipment transactions.

Reduce your tax bill through capital investment 2

For those who plan to take advantage of bonus depreciation this year, the savings can be impressive. The tables below illustrate the impact of a $500,000 qualifying equipment purchase on a company’s year-end tax liability1.

Without Equipment Purchase

Taxable Income $1,000,000

Corporate Tax Rate 21%

Tax Liability $210,000

With a $500,000 Qualifying Equipment Purchase

Taxable Income $1,000,000

Less Equipment Cost $500,000

Taxable Income after Equipment $500,000

Corporate Tax Rate 21%

Tax Liability $105,000

Potential Savings on Tax Liability $105,000

The bonus depreciation percentage phases out for most equipment by 20% each year beginning in 2023.

Section 179A second potential avenue for taxpayers to immediately write off the cost of an acquired capitalized asset is afforded by Section 179 of the tax code. As it did for bonus depreciation, the tax law makes a Section 179 tax-deduction strategy more attractive.

Section 179 allows a taxpayer to deduct the full cost of certain types of property on income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated over time. It allows a business to deduct, for the current tax year, the full purchase price of equipment and off-the-shelf software that qualifies for the deduction.

Section 179 allows for the immediate expensing of up to $1 million of qualified property placed in service during taxable years beginning after Dec. 31, 2017.

1 The information and figures contained in this document are samples for discussion purposes only and may not be applicable to your business. To verify the benefits of Section 179 or bonus depreciation, please consult with your tax advisor or accountant before engaging in the purchase or acquisition of equipment in which the benefits of Section 179 or bonus depreciation are a major factor in your decision.

Reduce your tax bill through capital investment 3

If you have a capital equipment need and want to use either of these enhanced tax-deduction strategies to lower your company’s tax bill, there’s still time.

Before the tax law was enacted, Section 179 limited immediate expensing to a maximum deduction of $500,000, with the balance being subject to depreciation. However, Section 179 now allows for immediate expensing of up to $1 million of qualified property placed in service in taxable years beginning after Dec. 31, 2017.

It’s important to note the $1 million limit on the deduction starts shrinking once a company puts more than $2.5 million of qualified property into service. The phase-out provision of Section 179 provides for a dollar-for-dollar reduction of the expensing limitation. For example, a company that puts $3 million of qualified property into service in a given year will see its Section 179 deduction reduced to $500,000, and a company that puts $3.5 million of qualified property into service will see no benefit.

Prior to the Tax Cuts and Jobs Act, the phase-out provision of Section 179 was $2 million.

The lack of a maximum dollar amount for bonus depreciation, in contrast with the phase-out provision of Section 179, is expected to make bonus depreciation a popular tax-deduction strategy for the foreseeable future, particularly for larger companies. Even so, Section 179 remains an important tax-deduction option where assets are not eligible for bonus depreciation. Differences in the ways taxpayers use Section 179 and/or bonus depreciation can also afford a tax advisor the ability to create the optimal strategy for a given taxpayer.

The Need for Timely PlanningBonus depreciation and Section 179 can make a capital acquisition more affordable regardless of whether a company pays cash or finances acquisition of the property.

If you have a capital equipment need and want to use either of these enhanced tax-deduction strategies to lower your company’s tax bill, there’s still time. However, you will need to move expeditiously to develop a plan that involves making a capital investment by Dec. 31.

Consulting with experts will be important as you plan. To verify the benefits of bonus depreciation or Section 179, consult with your tax advisor or accountant before purchasing equipment where the benefits of bonus depreciation or Section 179 are a major factor in your decision. Your banker can also provide counsel on related equipment finance strategies.2

Having a solid plan in place and seeking quality advice will help you make the right equipment purchase decisions and take full advantage of all available deductions under the tax law.

2 BB&T and its representatives do not offer tax or legal advice. Please consult your tax advisor and/or attorney regarding your individual circumstances.

BB&T, Member FDIC. Only deposit products are FDIC insured.©2019, Branch Banking and Trust Company. All rights reserved.