It is unlikely that you will stumble upon a business owner that enjoys tax season. A lot of money goes into creating and maintaining a business; putting more money aside for tax purposes is a hard pill to swallow, even for the most seasoned business owner. Fortunately, it is not all doom-and-gloom. Being able to write off certain expenses is something that business owners across the board are incredibly grateful for. Thanks to the Tax Cuts and Jobs Act, there are now more options at your disposal regarding writing off equipment and capital improvements. The new rules give business owners options outside of depreciation (spreading out your write-offs over the course of a few years) and are at your disposal regardless of whether you are fully financing a purchase, partially financing a purchase, or paying in cash.
Expensing in the First Year
The Tax Cuts and Jobs Act has expanded the terms for expensing as a whole. While expensing must be elected, in addition to purchasing new or pre-owned equipment or machinery for your business, you can now expense qualified improvement property (improvements made to the interior of a building that is nonresidential such as updating electrical wiring) as long as the improvements are put into service after the building was originally put into service; and various improvements such as roofing, ventilation, air conditioning, fire protection, and security systems. It should be noted that the expansion does not include residential buildings nor does it include attempts to make a nonresidential building larger (e.g. elevator or escalator installation).
Additionally, the past qualified property expense limit of $510,000 has been increased to $1 million and the $1 million limit does not phase out until the year’s total investments go beyond $2.5 million (a good jump from 2017’s $2 million). Keep in mind that once your investments reach $3.5 million or more, you are not eligible for expensing. Further, expensing is still solely for taxable income. For example, if you purchase $500,000-worth of equipment, but only receive $200,000 in taxable income, you are only able to apply the expense deduction to that $200,000.
Another way that your business can write off eligible purchases in the year that you purchased them is through something called bonus depreciation. While this tax-incentive has been around for a while, in 2018 business owners have the ability to apply the entirety of the cost of qualified property without being subject to a dollar limit. In addition, there are no taxable income limits and you do not have to apply for bonus depreciation (as you do with expensing), as bonus depreciation applies automatically. Bonus depreciation is a great way to get your benefits much faster than you would have been able to in the past.
To make matters even more enticing in regards to bonus depreciation, the property that is eligible for bonus depreciation has grown to include (like expensing) qualified improvement property. Further, it can be used for media production like film, television, and live performances. Another addition to the rules is that used assets now qualify for bonus depreciation. You no longer have to be the original purchaser to take advantage of these benefits.
De Minimis Safe Harbor Election
Your business can also opt to use a de minimis safe harbor created by the IRS. In layman’s terms, the IRS-created De Minimis Safe Harbor Election allows a business to deduct up to $2,500 (per item/invoice) towards non-incidentals and company supplies. The deduction is taken in whichever year these supplies are purchased or used. Of course, in order to take advantage of the De Minimis Safe Harbor Election, companies need to meet certain criteria such as having a written internal capitalization policy in place that states what the company’s threshold amount will be and how said assets will be treated. It is important that this policy is updated as deemed necessary.
Needless to say, there are quite a few options at your company’s disposal due to the changes enacted by the Tax Cuts and Jobs Act. It is important to remember that write-offs are not one-size-fits-all, and it is crucial that your company meets with a tax advisor in order to determine which write-offs your company would benefit from the most.