Most provisions of the new tax law that was passed in December 2017 went into effect on January 1, 2018. Tax law being a complicated subject, it’s not surprising that many small- and medium-sized businesses (SMBs) are still learning about the specifics of the legislation. In fact, according to an industry survey, 50 percent of small business owners are “not familiar” with the tax law and how it affects them. Among its wide-ranging effects is the impact it will have on business equipment leasing.
What You Need to Know About the New Tax Law and Equipment Leasing
It has been much publicized that the new tax law lowers the corporate tax rate from 35 percent to 21 percent. But, few small business owners actually pay corporate taxes. What does benefit LLCs, S corporations, and sole proprietorships in terms of how income is dealt with is a new 20 percent deduction for the taxable income that “passes through” and is taxed as personal income.
However, what may have an even bigger effect on small businesses is how the new tax law impacts the acquisition of assets. If your company is looking to lease computers, furniture, software, and the other assets you need to operate, we see the new tax law (in particular, Section 179) as having two primary provisions you should be aware of. The first is that at the time you acquire an asset, you can now expense up to 100 percent of the cost. And, the write-off for equipment has doubled from $500,000 to $1,000,000.
Previously, companies would spread out the expense of equipment over, say, five years. Now you are allowed to take that expense in the first year. If your business is profitable, this upfront “hit” can be very beneficial as the depreciation expense lowers your taxable income, allowing you to pay less tax and keep more of your money. What you are able to do in a leasing scenario is even better. You can still make your payments over time even if you take the expense and lower your tax obligation on Day 1.
The second key advantage of the new tax law is that the provision above applies to both new and used assets. In the past, you only received benefits for the acquisition of brand new equipment, software, etc. Now used assets are covered as well. In fact, while they don’t occur often in our business, even sale/leaseback transactions can be treated this way.
The Bottom Line for Your Business Leasing
The implementation of the new tax law puts us in the coveted position of being the bearers of this very positive news! And, we’re eager to spread the word to our clients.
Ultimately, the legislation is advantageous to SMBs when it comes to acquiring assets in general. And, it’s important to remember that if that acquisition is through a capital lease, you get the best of both worlds: taking the expense up front while spreading the cash flow over time. This can be especially beneficial if your business is like most and cash flow is actually more important to you than expense.
If you have questions about how the 2018 tax law can be used to your advantage on computer, furniture, software, or other leases, please contact us. We’re happy to talk specifics about your business leasing needs and how the new legislation will impact you financially.