The new small business tax deduction in the Trump tax plan

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I can’t believe nobody is talking about this change in the new Trump tax plan, but it shouldn’t be a secret.

One of the biggest changes for business is a dramatic increase in the amount you can deduct from your taxable income for equipment purchases—and “equipment” means anything from a car to computer software.

Under the new plan, the deduction has been raised to $1 million, with a cap of $2.5 million in equipment purchases before the deduction starts to phase out.

But that $1 million deduction isn’t even the best part.

Bonus depreciation means unlimited expensing in 2018

Bonus depreciation is a provision that allows you to record more than the standard amount of depreciation in the first year you purchase a piece of equipment—and for 2018, it’s set at 100%.

Here’s how bonus depreciation works:

Kevin purchases a $20,000 vehicle for his painting business. He expects to get five years of use from it, so his depreciation expense each year should be $20,000/5 =$4,000.

Under Trump’s new tax plan, bonus depreciation is set at 100% of equipment value (it used to be 50%).

This means there is effectively no limit on the amount Kevin can deduct from his income for equipment purchases—he can immediately expense the full $20,000 cost of the vehicle.

Let’s look at two examples of how both the $1 million deduction and bonus depreciation work together.

Bonus depreciation saves you money

Example 1

Kerri owns a fabric printing business that makes $500,000 in equipment purchases this year. That number falls well below the $1 million cap, so she will be able to deduct 100% of those expenses.

Example 2

Bill owns a mid-sized bottling company. He makes $5 million in equipment purchases—well over $2.5 million cap, so he doesn’t get the $1 million deduction.

But thanks to bonus depreciation, he can still deduct the full $5 million from his income. 

After 2018, bonus depreciation begins to decrease by 20% each year until it is phased out completely, so it’s critical to take advantage of this while you can.

Making the most of immediate expensing—don’t wait

If you plan on buying equipment in the next few years and can do so now, don’t wait!

Even if your equipment purchases won’t exceed the $1 million deduction, it’s still a good idea to make these purchases up front since any net losses you incur can be carried forward to offset your taxes in future, more profitable years.

How to plan your cash for equipment purchases

Big equipment purchases have an impact on cash flow—you need to think about where the cash will come from and how it will impact the rest of your business.

There are two primary sources you can use: you can borrow money, or you can use your own.

If you borrow money to make the purchases, make sure your interest expense won’t exceed 30% of your earnings for the year, since those are now taxed.

An even better way to fund equipment purchases is to use your own cash– and if your cash is locked up in accounts receivables, we can help. 

More than 100,000 businesses use C2FO to improve cash flow by getting their customers to pay them early— for discounts averaging just 0.5%. 

C2FO does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.