cost segregation study helps avoid tax depreciation loss

Is Your Business Being Hurt by the New Tax Law?

A recent article in Accounting Today reported on several significant changes in the new tax law – the Tax Cuts and Jobs Act of 2017, or TCJA – that can help or hurt American businesses depending on which industry they’re in.

The article, “Tax Tips for Small Businesses”, highlights three that take effect this year (2018) and are especially significant – two for the better and one for the worse – for many U.S. businesses:

1. New 20% tax deduction for S-corporations – Because the IRS has yet to issue formal guidance as to who exactly qualifies for this new tax deduction, there’s still time for sole proprietorships, LLCs, and LLPs to evaluate current organizational structures to determine whether it’s worth reorganizing as an S-Corp to capture this significant tax deduction.

2. You can now EXPENSE big ticket asset purchases – The new 100% bonus depreciation that allows businesses to expense the entire cost of certain asset purchases in their first year of use, rather than depreciating that cost over time, makes such purchases far more attractive by lowering companies’ taxable income and thereby reducing their tax burden.

3. Marketing deductions for meals and entertainment drastically slashed – Business deductions for meal expenses for clients, customers and prospects are now only 50% deductible, while entertainment costs for clients, customers, and prospects are no longer deductible at all.

Some businesses will benefit by restructuring into S-Corps, while businesses that need to buy new equipment, including transportation equipment (cars and trucks), to replace aging assets or to expand their business will benefit by deducting the entire expense in the current year and reducing their tax liability accordingly. This will disproportionately benefit businesses that manufacture and distribute such assets – manufacturers, auto dealers, etc.

This Tip Hurts Every Business

Not so for the third tip: no business will benefit by no longer being able to fully deduct meals and entertainment costs, which greatly increases the after-tax cost of these marketing expenses – by a 75% order-of-magnitude – and bodes especially poorly for businesses that supply these amenities: restaurants, hotels, sporting and music venues and the franchises that fill them, etc.

So it’s a bit of a mixed bag for many businesses and all the more reason to heed the other two tips from this article – the increased need for proper bookkeeping and the growing importance of making quarterly payments to avoid fines and penalties.

It also heightens the importance, and timeliness, of assuring your business is capturing all the specialized tax incentives the government offers, things like…

R&D and employee hiring (WOTC and more) tax credits,
• Appealing local property tax over-assessments, and
• Engineering-based cost segregation studies to more precisely depreciate building and land improvement costs.

Don’t Lose 40% Overnight

Warning: The value of these cost segregation deductions will decline by over 40% effective October 15, 2018 due to the lower tax rate these deductions will offset. In short, your deductions are worth more to you while you’re still taxed at today’s higher rates than they will be after tax rates decline on October 15 – a hidden downside of the lower tax rates that are about to take effect.

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