What Section 168K of the Tax Cuts and Jobs Act Could Mean for You
By Liza Long
The COVID-19 pandemic has presented extraordinary challenges for businesses, including disruptions in supply chains, shortages in workforce, and variations in consumer demand. For small business owners striving to remain viable, overcoming these obstacles has proven to be quite difficult. Nevertheless, a specific provision within the 2017 Tax Cuts and Jobs Act (TCJA) may offer a significant source of financial relief: bonus depreciation as outlined in Section 168K.
Depreciation has long served as a mechanism for businesses to mitigate the costs associated with capital investments, such as machinery, equipment, or property enhancements. Typically, these expenses are deducted over a series of years, contingent upon the asset’s classification: Retail or restaurant equipment; 7 years, Computers 5 years
Landscaping or land improvements: 15 years. However, Section 168K has introduced a temporary alteration to this standard practice. Under the TCJA, business owners are permitted to deduct 100% of qualifying capital expenditures in the year they are incurred. This provision is scheduled to phase out gradually, beginning at the end of 2022, when the allowable deduction will decrease to 80%, ultimately reaching 0% by 2027. This expedited depreciation can offer substantial short-term financial relief. However, as with many tax strategies, it entails complexities and risks that business owners should thoroughly assess with the assistance of a qualified tax professional.
Prior to fully engaging with bonus depreciation, it is crucial to comprehend its potential effects on your overall tax situation and the associated risks. I consulted with Susan Langley, a certified public accountant and partner at Coles Reinstein Accounting and Consulting in Boise, to gain further understanding of how Section 168K operates and when it may be advantageous.
Langley emphasized that Idaho does not align with federal bonus depreciation regulations.
Langley elaborated, “If you opt for 100% accelerated depreciation on a $10,000 expense, Idaho will reintegrate this amount into your profits and apply standard depreciation rates rather than accelerated ones. Although you may claim the entire amount on your federal tax return, your state return will permit only a partial deduction, with depreciation allocated over the subsequent 5 to 7 years.” This inconsistency necessitates that business owners manage their asset depreciation differently for federal and state tax filings, thereby increasing administrative complexity. Should you switch accountants or tax preparers in the future, this dual tracking could pose a significant challenge.
Assessing the Advantages of Section 168K
In light of the added complexity, when is it advantageous for business owners to utilize Section 168K bonus depreciation? Langley indicates that the answer is largely contingent upon individual circumstances.
One important consideration is the tax bracket. Currently, Idaho’s income tax rate is 6%, while the highest federal rate reaches 37%. For business owners situated in lower tax brackets, the immediate benefits of bonus depreciation may not justify the administrative effort required to maintain separate records for federal and state returns. Conversely, those in higher tax brackets may find the potential savings to be considerable.
Section 168K Compared to Section 179
It is important to recognize that business owners already possess a mechanism for immediate asset write-offs through Section 179 of the U.S. Tax Code. This provision allows businesses to deduct up to $1 million in qualifying assets at a 100% rate. So, why might one consider Section 168K bonus depreciation instead?
The primary difference lies in the conditions regarding profitability. Section 179 write-offs are only accessible if the business demonstrates a net profit. In contrast, Section 168K permits 100% bonus depreciation even if the business incurs a loss. This flexibility can significantly benefit businesses with fluctuating profitability or diverse revenue streams.
A Theoretical Case Analysis
Langley provided an illustration of the strategic application of Section 168K. Consider a client who operates multiple businesses. One of these businesses yields considerable profits, placing the owner in the highest federal tax bracket, while another business faces substantial startup expenses and reports a loss. By utilizing bonus depreciation for the latter business, the owner can effectively reduce the tax liability associated with the profits from the former. This strategy can lead to significant tax savings, particularly for enterprises with considerable initial capital expenditures.
“The rationale behind this provision was to assist small business owners with their tax burdens while simultaneously stimulating economic growth,” Langley noted. Initially, Section 168K was restricted to new equipment; however, the Tax Cuts and Jobs Act (TCJA) broadened the eligibility criteria to encompass used equipment as well. This modification enhances the provision’s potential advantages for small business proprietors.
Considerations to Keep in Mind
Although the advantages of Section 168K bonus depreciation are evident, several considerations should be taken into account prior to implementing this strategy:Long-Term Tax Consequences: While bonus depreciation provides immediate tax relief, it diminishes future deduction opportunities. Business owners must carefully assess the short-term gains against the possible repercussions for long-term tax strategies.
- Documentation Requirements: Maintaining distinct depreciation schedules for federal and state tax returns necessitates thorough record-keeping. This task can be particularly daunting for small business owners lacking dedicated accounting personnel.
- Asset Durability: For assets with an extended useful life, distributing deductions over multiple years may yield more stable tax benefits than opting for a single deduction.
Future Planning
As the bonus depreciation rate is set to gradually decrease, it is prudent to assess whether this strategy aligns with your business objectives. Langley highlighted the necessity of proactive planning and the importance of consulting with a qualified tax advisor.
“It is essential to have an expert assess your individual circumstances,” she stated. “Every business is unique.” It is essential to consult an expert to assess your individual circumstances, she remarked. Each business has its unique characteristics, and a solution that is effective for one may not be applicable to another.
The Bottom Line
Section 168K of the TCJA offers a significant opportunity for business owners to lessen their tax liabilities and reinvest in their enterprises. Nevertheless, its intricacies and possible challenges underscore the necessity of collaborating with a skilled tax advisor. Whether you are contemplating bonus depreciation for new or used equipment, or a combination of both, investing time to comprehend your alternatives can greatly influence your financial results. For More Information
If you are a business owner seeking to gain further insights into Section 168K bonus depreciation, it is advisable to contact a reliable tax professional. They can assist you in navigating the regulations, assessing your choices, and formulating a strategy that aligns with your objectives.
Coles Reinstein PLC
[https://colesreinstein.com/](https://colesreinstein.com/)
