Cameron Miranda
The new tax law has made it more economically attractive for companies to acquire capital assets, including equipment. Under the new law, companies can fully expense 100% of their investment in new and used equipment through 2022 for most assets. This has made it more affordable for companies to put assets into service, and the inclusion of used equipment offers greater flexibility in capital investment decisions. However, the new law also requires financial managers to carefully evaluate the provisions to determine the best funding method for equipment acquisition. For example, the Tax Cuts and Jobs Act preserved like-kind exchange treatment for real property but eliminated it for personal property, which may impact how equipment trades are handled. Additionally, the new law introduces limitations that may make leasing a more attractive option in some cases. Overall, businesses need to plan their capital expenditures with tax professionals to ensure they are optimizing their financial structure.
| Characteristics | Values |
|---|---|
| Treatment of equipment "trade" | In 2018, a transaction involving a trade of equipment will be treated as a sale and purchase. |
| Tax Cuts and Jobs Act | Preserved like-kind exchange treatment for real property, but eliminated it for personal property. |
| Section 179 | A tax deduction that allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. |
| Section 199A(c)(3)(B) | Excludes § 1231 gain from the definition of QBI, which is taxed like capital gain. |
| Corporate Alternative Minimum Tax (AMT) | Repealed by the new tax law. |
| Loss Carrybacks | Eliminated by the new tax law. |
| Loss Carryforwards | Limited to 80% of taxable income under the new tax law. |
| Business Interest Deduction | From 2018 to 2022, businesses with average gross receipts of $25 million or more can only deduct business interest equal to 30% of EBITDA. |
| Capital Assets | Can include physical assets such as computers and vehicles, and intangible assets such as patents and copyrights. |
| Capital Expenditures (CapEx) | Must be depreciated and deducted over a period of years, unless they qualify for a Section 179 deduction. |
| Operating Expenses (OpEx) | Can be deducted in the year of purchase. |
| Equipment Acquisitions | Considered capital assets and may include costs such as acquisition cost, freight, sales tax, installation charge, etc. |
| Equipment Fabrication | May be classified separately from equipment acquisitions and subject to different rules. |
| Betterments and Upgrades | Betterments and upgrades to capitalized equipment below a certain cost threshold may be classified as expense items. |
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What You'll Learn
Companies can expense 100% of investment in equipment
The new tax law has made it possible for companies to expense 100% of their investment in equipment, both new and used, through 2022 for most assets. This is a significant change from previous years, where business owners could only deduct about 60% of the cost of new equipment in the first year and were not allowed to deduct the cost of pre-owned equipment. Now, companies can deduct the full cost of equipment in the same year it is purchased, which offers greater flexibility in capital investment decisions and makes acquiring capital assets more economically attractive.
This change is part of the Tax Cuts and Jobs Act, which eliminated like-kind exchange treatment for personal property, including equipment, beginning in 2018. Previously, like-kind exchanges allowed business owners to sell an asset and replace it with a similar one without creating a tax liability from the gain of the sale. Now, like-kind exchanges are only allowed for real estate assets. This change impacts businesses that were planning to exchange equipment, machinery, or other personal property.
The new tax law also repeals the corporate alternative minimum tax (AMT), simplifying the tax code and making it easier for businesses to plan their capital expenditures. However, it is important to note that the law also eliminates loss carrybacks and limits loss carryforwards to 80% of taxable income. Additionally, businesses with average gross receipts of $25 million or more will only be able to deduct business interest equal to 30% of EBITDA (earnings before interest, tax, depreciation, and amortization).
Overall, the ability to expense 100% of investment in equipment under the new tax law provides significant benefits to companies, reducing the overall cost of putting an asset into service and allowing for more strategic financial planning. However, businesses should consult with tax professionals and equipment finance specialists to ensure they are complying with the new law and maximizing their tax benefits.
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Capitalizing repair and maintenance costs
The new tax law has made acquiring capital assets more financially attractive. However, it also requires financial managers to evaluate the provisions to determine the best method of funding those acquisitions. For instance, the new law repeals the corporate alternative minimum tax (AMT), but it also eliminates loss carrybacks and restricts loss carryforwards to 80% of taxable income. Under the new tax law, a company can fully expense 100% of its investment in both new and used equipment through 2022 for most assets. This has made leasing a more attractive option for many businesses.
The final tangible property regulations provide a framework to help taxpayers determine whether a cost is deductible as a repair and maintenance expense or must be capitalized because it is an improvement. The regulations combine case law and other authorities into a framework to help taxpayers determine whether certain costs are currently deductible or must be capitalized.
If the amounts are not paid or incurred for an improvement to tangible property, they are generally deductible as repairs and maintenance. However, if the cost is for a betterment to the unit of property, a restoration of the unit of property, or an adaptation of the unit of property to a new or different use, then the amounts paid to improve a unit of property must be capitalized.
The regulations also provide a "safe harbor" for routine maintenance. Routine maintenance is considered recurring activities (inspection, cleaning, testing, replacing parts, etc.) that are expected to be performed to keep the property in its ordinarily operating condition.
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Taxpayers can structure transactions as sales
The Tax Cuts and Jobs Act preserved like-kind exchange treatment for real property but eliminated it for personal property. This means that taxpayers who want to trade equipment must structure the transaction as a sale and purchase to avoid being automatically deemed a like-kind exchange by the IRS and the courts.
In a typical asset sale, the seller retains possession of the legal entity, while the buyer purchases the underlying assets of the company. This permits the buyer to receive a "step-up" in depreciable basis on the purchased assets, which can result in higher deductions and reduced taxes. An asset sale may also ease the burden of potential future liabilities related to product or warranty liability or employee issues.
However, an asset sale may result in a higher tax liability for the seller due to depreciation recapture, as certain assets may be taxed at ordinary income tax rates instead of capital gains rates. To mitigate this, the buyer can make an election under IRC Section 338(h)(10) or Section 336(e) to treat the stock purchase like an asset purchase and receive a step-up in basis on the underlying assets.
Additionally, under the new tax law, a company can fully expense 100% of its investment in both new and used equipment through 2022 for most assets. This significantly reduces the overall cost of putting an asset into service and offers greater flexibility in capital investment decisions. The new law also repeals the corporate alternative minimum tax (AMT) and eliminates loss carrybacks, limiting loss carryforwards to 80% of taxable income.
The final tangible property regulations provide a framework to help taxpayers determine whether a cost is deductible as a repair and maintenance expense or must be capitalized as an improvement. This framework combines case law and administrative rules, allowing taxpayers to make more informed decisions about their equipment financing and capital expenditure planning.
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Capital assets: physical and intangible
Capital assets can be physical or intangible. Physical capital assets are those that have a physical substance and can be seen, touched, and felt. Examples include land, buildings, vehicles, furniture, and equipment. These are also referred to as tangible assets.
Tangible assets can be further categorized into two types: inventory and fixed assets. Inventory refers to current assets that can be easily converted into cash, such as raw materials or finished goods held by a company. Fixed assets, on the other hand, are tangible assets with a lifespan of one year or more and are used to produce goods, provide services, or are used for rental or administrative purposes. Examples include property, plant, and equipment (PP&E).
Intangible assets, on the other hand, lack physical substance and cannot be seen or touched. Examples include patents, copyrights, trademarks, brand names, goodwill, intellectual property, and digital assets. These assets are often crucial to a company's long-term success and can be challenging to value due to their indefinite lifespan.
In the context of tax laws, the treatment of capital assets varies between physical and intangible types. For physical assets, the Internal Revenue Service (IRS) guidelines, such as the final tangibles regulations, help determine whether a cost is deductible as a repair and maintenance expense or must be capitalized as an improvement.
For intangible assets, treasury regulations in the USA generally require the capitalization of costs associated with acquiring, creating, or enhancing such assets. This means that expenses incurred in obtaining or developing intangible assets, such as trademarks or patents, must be capitalized and can impact tax strategies.
The new tax law, effective from 2018 to 2022, has made acquiring capital assets more financially attractive. It allows businesses to fully expense 100% of their investment in both new and used equipment, reducing the overall cost of putting an asset into service. However, it is important for businesses to consult with tax professionals and equipment finance specialists to navigate the tax provisions and determine the best funding methods for their capital acquisitions.
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Capital expenditure planning
One key change is the simplification of the tax code, which enables businesses to plan more strategically. For example, capital-intensive businesses like trucking companies no longer need to maintain separate sets of books for AMT, making it easier to plan with tax professionals and banks to maximize the net present value of capital equipment investments. The new tax law also allows companies to fully expense 100% of their investment in both new and used equipment through 2022 for most assets, reducing the overall cost of putting an asset into service and offering greater flexibility in capital investment decisions.
However, the new law also eliminates loss carrybacks and limits loss carryforwards to 80% of taxable income. It is important for businesses to evaluate the impact of these changes on their specific situations and consult with tax professionals and equipment finance specialists to determine the best funding methods for their capital acquisitions.
Timing is crucial in capital expenditure planning. By timing purchases strategically, businesses can take advantage of depreciation to minimize taxable income and improve cash flow. Bonus depreciation, for instance, allows businesses to depreciate 100% of the cost of eligible property in the year it is placed in service. Additionally, businesses should stay up-to-date with changing tax regulations, as certain provisions like bonus depreciation were extended beyond their initial phase-out dates.
When planning capital expenditures, businesses should consider the different methods of depreciation, such as the Straight Line method and the Modified Accelerated Cost Recovery System (MACRS). Consulting with tax professionals can help businesses understand these methods and determine if they qualify for beneficial deductions like Section 179, which allows for the immediate deduction of the full cost of an asset up to a certain limit.
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Frequently asked questions
The new tax law, also known as the Tax Cuts and Jobs Act, has eliminated like-kind exchange treatment for personal property, which includes equipment. This means that equipment trades will now be treated as sales and purchases, and the full cost of the equipment will be depreciated over its useful life.
The new tax law makes acquiring capital assets more economically attractive for businesses. Under the new law, businesses can fully expense 100% of their investment in both new and used equipment through 2022 for most assets. This reduces the overall cost of putting an asset into service and offers greater flexibility in capital investment decisions.
Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. To qualify, the equipment must be tangible personal property, such as machinery, equipment, or off-the-shelf computer software. It must also be used for business purposes more than 50% of the time and put into service in the same tax year the deduction is claimed.
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