Five Big Benefits of the New Tax Law
1. A 20% deduction for all pass-through income (think S-corp and Sole prop businesses)
Pass-through income is business income that is taxed once at the individual rates of the business owner, instead of through the corporate tax structure. More than 40 million taxpayers claimed pass-through income on their individual tax returns for 2016 as did almost 83% of small and mid-sized businesses. While there are specific details and complexities to the application of this feature, most businesses will find some material financial relief from the historic double taxation of pass-through income.
2. Equipment depreciation deduction limits have been increased to $1,000,000 with cumulative deductions from equipment depreciation that now start to phase out after $2,500,000
It is inarguable that equipment investment directly correlates to growing businesses and a surging economy. Over the last two years, Congress has increased the depreciation deductibility of equipment purchases drastically. By leveraging these deduction benefits, businesses can deploy revenue-producing equipment or technologies that drive efficiencies for a far lower net investment.
3. Equipment depreciation benefits described above now apply to purchases of new and used equipment
This is arguably one of the more hidden and most powerful benefits of the new tax law. Many businesses rely on the acquisition of used equipment as a method of driving maximum ROI for their company. But in recent years, the power of "bonus depreciation" deductibility was reserved for the purchase of new equipment. The new tax law now extends this benefit to any equipment that is "new to you" or used equipment purchases.
4. The cap on depreciation allowances for some company vehicles and a variety of IT assets placed in service in 2018 will no longer meet the heightened substantiation requirements to realize the depreciation benefits of more traditional commercial assets
In previous years, many IT assets and company vehicles were required to meet a higher justification standard in order to attain the full depreciation benefits. This heightened substantiation requirement no longer applies with the new tax law and opens the door for more affordable acquisition of technology and fleet assets.
5. Reinvestment of surplus cash from these tax benefits combined with still historically low interest rates might yield a limited window to achieve growth at the lowest possible cost
Any way you evaluate the new tax law, there is a theme of reinvestment that is consistent. Most businesses will be able to directly or indirectly drive more cash into operations and away from tax requirements. With historically low interest rates still available, marrying surplus cash with low cost of capital could yield a powerful opportunity for growth at a lower cost. But now is the time to act. Interest rates will undoubtedly continue their gradual ascent for the foreseeable future, eating into the impact of the opportunity at hand.