There is a risk that changes to the tax act will result in gas pumps, underground tanks, LED’s and other convenience store equipment costing retailers significantly more. If the Trump Tax Plan becomes law in 2017, Section 179 benefits may no longer be available to convenience store owners.
Section 179 is a popular tax incentive designed to encourage small businesses to purchase capital equipment. The incentive allows businesses to take depreciation tax deductions that would normally be taken over 5, 7 or 10 years in the first year. This can result in significant cash flow benefits for convenience store operators. For example, on a $100,000 equipment purchase, a gas station operator in a 35% tax bracket could capture $35,000 in first year tax savings rather than the traditional $5,000 tax benefit.
Current Status of Section 179
Section 179 is now a ‘permanent’ part of the tax code. This means that when Section 179 was made a part of the tax code it was not subject to annual renewal, allowing businesses to plan their capital expenditures with certainty related to the tax benefits.
Options That Could Impact Section 179
There are two trains of thought on how the Trump Tax Plan will deal with Section 179. The Trump plan is silent on how depreciation will be handled. Bonus depreciation will be caught in a tug of war between for the desire for economic stimulus and the desire to reduce the budget deficit. These goals are in conflict, as the more accelerated depreciation is used the greater the short term impact on tax revenue and therefore the deficit.
The Ryan Plan suggests that capital investment be fully deductible in the year of purchase. If the Trump Plan ends up going along with this approach, the $500,000 annual Section 179 cap could be removed, increased to $1 Million as Trump proposed on the campaign trail, or have no cap.
Impact of Lower Tax Rates on Section 179 Depreciation
If corporate taxes are lowered to 15%, for many companies capital equipment will effectively become 25% or more expensive. This will happen regardless of an increase or elimination of the maximum $500,000 Section 179 deduction.
Today, a convenience store in a 35% tax bracket would have an after tax cost of $65,000 on a $100,000 gas pump, major oil brand reimaging or other purchase. This reflects the $35,000 deduction the business would realize.
If the maximum tax becomes 15%, this $35,000 would become $15,000, or $100,000 times 15%. The after tax cost for the c-store is now $85,000, $20,000 or 30% more than today.
What is fairly certain is that purchasing equipment today will benefit a business owner with both a higher rate of depreciation and the ability to use Section 179. Both of these can have significant cash flow benefits to your convenience store, QSR or manufacturing business. Waiting to see what the Trump Tax Plan yields may result in a significantly higher after tax cost for small business equipment.
For examples of how Section 179 could benefit your business, please see this article from CSP Online. For a discussion of the potential impacts of the Trump Tax Plan on convenience store operators, please see this article.
**This article is not intended to provide tax or legal advice, please consult your tax and legal professional advisors for advice regarding your particular situation.