Tax Cuts and Jobs Act: Writing Off Costs
By MARK BATTERSBY
Need new equipment? Unlike in past years when feedlots and other businesses were required to claim depreciation deductions, spreading the recovery of their equipment costs over several years, thanks to the Tax Cuts and Jobs Act (TCJA), operators will be able to fully and immediately deduct the cost of certain equipment. While the faster write-off of equipment costs is only temporary, the writeoff has been made retroactive to September 27, 2017.
Specifically, the current writeoff is at the 100-percent level for equipment expenditures made between September 27, 2017 and January 1, 2023. After 2023 and before 2025, the amount deductible drops to 60-percent with a further decrease to 40-percent after 2025 and to 20-percent after 2026.
Despite the differences between bonus depreciation and the tax law’s Section 179, first-year expensing, the TCJA has narrowed those differences with both now offering 100-percent write-offs for new and used property. Thus, Section 179 remains an improved option.
Section 179 allows up to $1 million (up from $500,000 in 2017) of expenditures for business equipment and property to be treated as an expense and immediately deducted. The ceiling after which the Section 179 expensing allowance must be reduced dollar-for-dollar has also been increased from $2 million to $2.5 million.
The immediate write-off, or “expensing” of capital assets is appealing because, unlike so-called “bonus” depreciation, the use of equipment doesn’t have to begin with the feedlot operation. And now, improvements including roofs, heating, ventilation, air conditioning systems, fire prevention, alarms and security systems qualify under the new Section 179 rules, providing another opportunity for feedlots and other businesses that actually need equipment.
When business property and equipment is disposed of, the tax law’s Section 1031 governing likekind exchanges provides an option. Section 1031, the like-kind exchange rules, currently allows feedlots to defer the tax bill on the built-in gains in property by exchanging it for similar property. Although more a strategy for deferring a tax bill when business assets are lost, sold, abandoned or otherwise disposed of, with multiple exchanges, gains can be deferred for decades and ultimately escape taxation entirely.
Under the TCJA, like-kind exchanges will be limited to so-called “real” property (but not for real property held primarily for sale). This ensures real estate investors will maintain the benefit allowing deferral of capital gains realized on the sale of property.
In the past, our tax laws have protected the ability of small businesses to write-off the interest on loans. Now, however, paying for that new equipment or business property might be impacted by the TCJA.
In an attempt to “level the playing field” between businesses that capitalize through equity and those that borrow, the TCJA caps the interest deduction to 30-peercent of the adjusted taxable income of a feedlot business. Exceptions exist for small businesses to protect their ability to write off the interest on loans that help them start or expand a business, hire workers and increase paychecks.
Simplifying the method of accounting required for a feedlot is a nice option to have. Under the TCJA the current $5 million threshold for corporations and those partnerships with a corporate partner to use the easier cash basis method of accounting has been increased to $25 million. Plus, the requirement that such businesses satisfy the $25 million requirement for all prior years has been repealed.
The increased $25 million threshold has also been extended to farm corporations and farm partnerships with a corporate partner, as well as family farm corporations. Also under the provision, the average gross receipts test would be indexed to inflation.
With the cash method of accounting, a stocker operation or feedlot may account for inventory as non-incidental materials and supplies. Or, as an alternative, a business with inventories using the cash method of accounting would be able to account for its inventories using the method of accounting reflected on its financial statements or its books and records.
Tax Reform begins in earnest with the 2018 tax year. Partially retroactive to September 27, 2017, the Tax Cuts and Jobs Act, will require professional assistance in reaping its many benefits — and avoiding its pitfalls.