You have probably heard that the 2018 tax reform is the biggest in decades, and it has given small business owners a few things to smile about. What’s in it for you? Although the details of the Tax Cuts and Jobs Act are somewhat complex in places and still open to interpretation, there is something in the new tax code to make almost everyone happy.
Thanks to this process, most small business owners will have more money in their pockets after taxes, and if you have been thinking about purchasing new equipment for your business, the new tax rules will give you motivation to act.
A New Tax Deduction for Small Business
There are two changes in the tax code that will especially benefit small business. The first is the business income deduction for pass-through companies, and the second is bonus depreciation, which allows you to deduct the cost of new equipment. This is some pretty thick with tax jargon, so we will go over some of the details.
Most small businesses are pass-through companies, which are any form of business structure except the classic corporation. Since corporate income is taxed twice (corporations pay a profit tax and the recipients of their dividends pay income tax on that money), most small businesses avoid that form of organization. Money passes through the other structures, such as LLCs, sole proprietorships and S-corps, and is taxed as the owners’ income.
Now 20% of that income can be deducted from your taxes in many cases. Specifically, that deduction applies to people who run pass-through companies and earn up to $157,500 if filing singly or $315,000 for joint filers. For business owners earning more than that but less than $207,500 singly or $415,000 jointly, the deduction is smaller but still applicable.
There are a few caveats here, though. Companies that offer professional services, such as doctors, lawyers, and accountants, are subject to somewhat different rules that seem to be still subject to debate—tax professionals have until April 2019 to figure the new rules out and seek clarification from the IRS, and that is a slow process. Architects and engineers are subject to a third set of rules.
While the exact benefits of the tax deduction may vary among business owners, many people can expect to see significant tax savings thanks to the new deduction.
New Benefit for Equipment Buyers
Bonus depreciation is much more straightforward. You are probably familiar with depreciation, since it is a mandatory part of business accounting. The principle is that things (buildings and equipment, not land) lose value as they wear out. As a result, small business owners are expected to make annual incremental deductions of the cost of major purchases.
You can depreciate a piece of equipment in equal annual sums, or you can use bonus depreciation to take a larger deduction the year you make the purchase. Previously, you were allowed to deduct 50% of a major equipment purchase that year, up to $510,000. Now you can deduct the full purchase price, up to $1 million.
Depreciating 100% of new equipment purchases does not provide you with any more money than you would get from linear depreciation, it just gets it to you faster—a lot faster, and all at one time. This lets you use it all at one time, if you choose to. The best part is you will get extra money back if you’ve made any major purchases since September 2017, since the new rules were made retrospective to that time.
It’s best to act sooner rather than later to take advantage of these new changes. The deduction for pass-through companies and bonus depreciation are available to business owners only through the end of 2025. After that, the 20% deduction will no longer be offered and depreciation rules revert to their previous state.
Put Your Tax Benefits to Work with an SBA 504 Loan
These new benefits are meant to stimulate small business by providing business owners more funds to work with. A Small Business Administration (SBA) 504 loan provides a good way to take maximum advantage of this opportunity, particularly in regards to the enhanced depreciation.
The 504 loan offers accessible, affordable financing designed to help small businesses thrive. It is fixed-asset financing, which includes:
- commercial land or buildings
- building construction
- large equipment purchases
- upgrades to buildings
- refinancing commercial real estate mortgages
The 504 loan is administered by a Certified Development Company (CDC) such as TMC Financing, and loans are granted in conjunction with a conventional lender (bank or credit union) that provides 50% of the total project cost. Your CDC facilitates the SBA loan for up to 40% of the cost, or $5 million ($5.5 million for manufacturing projects or if the project is eligible for the Green Energy Program), at a fixed, below-market rate. You provide 10-15% of the project cost as a down payment. A 504 loan can have a term of 10, 20 or 25 years, with full amortization (no balloon payments).
If you’re ready to take advantage of the new tax reform benefits to grow your small business, now is the time to take action. You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender, and has funded projects worth more than $9 billion across California and Nevada, resulting in the creation of an estimated 60,000 jobs. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.
- What Is a Certified Development Company? - May 12, 2022
- The SBA 504 Program: Why It’s an Optimal Finance Solution for Self-Storage Operators - June 22, 2020
- Turn Equity Trapped in Real Estate into Cash with the SBA 504 Program - April 23, 2020