Updated: Mar 11, 2019
C-Store Operators may miss out on 2017 tax savings if they don’t act soon. None of us can dispute the fact that lots is changing in Washington these days. One area that’s getting a lot of discussion through the fall is changes to the tax code. For fuel retailers, these changes may have an impact on your future cash flows and current tax savings.
By Chris Santy, President, Patriot Capital
None of us can dispute the fact that lots is changing in Washington these days. One area that’s getting a lot of discussion through the fall is changes to the tax code. For fuel retailers, these changes may have an impact on your future cash flows and current tax savings.
Three strategies that can help you reduce your 2017 taxes and 2018 expenses are Section 179, Bonus Depreciation, and the impact of reduced corporate tax rates.1
To take advantage of the tax deductions this year, equipment must be installed and in service by Dec. 31, 2017. With current lead times on some equipment reaching 6 weeks, and additional lead times for scheduling installation, waiting much longer may put these tax savings out of reach for you this year.
Section 179 and Bonus Depreciation Overview
Section 179 and Bonus Depreciation are both forms of ‘accelerated depreciation’. These strategies allow you to recoup all of (Section 179), or a significant portion of (Bonus Depreciation), an assets’ depreciation in the first tax year the equipment is put into use.
Suppose your store upgrades its pumps, tanks and does some brand imaging work, at a total cost of $280,000. Normally, a business may depreciate the investment over 7 years, getting an annual tax deduction of $40,000. Under Section 179, a business may deduct up to $500,000 of capital equipment purchases in year one. In this case the business could deduct all $280,000 in 2017. If the business is in a 30% tax bracket, this would generate $84,000 in both tax savings and incremental cash flow.
“Bonus depreciation may result in substantial present value tax savings for businesses” Baker Tilly Insights, Jan, 2016
If this same site added a canopy, beer caves and a QSR food program, the $280,000 spend could become $600,000. Bonus depreciation kicks in above $500,000 and allows c-store business owners to deduct 50% of the amount between $500,000 and $2 Million as first year depreciation. In this example, the retailer could deduct $500,000 at 100%, and $100,000 at 50%, for a total 2017 deduction of $550,000. At a 30% tax rate, this would yield $165,000 of tax benefits.
In determining how to use these tax savings, also be aware that the 50% deduction for Bonus Depreciation falls to 40% in 2018 and 30% in 2019 under the current tax act.
Will After Tax Equipment Costs Increase?
If the proposed Trump tax act changes result in lower corporate taxes, the value of depreciation will be lower, resulting in the after tax cost of equipment increasing by over 25%.2
For example, a $15,000 dispenser purchased by a company in a 40% tax bracket has a net after tax cost of $9,000 after $6,000 in depreciation is taken into account. If tax rates for companies fall to 20%, this same $15,000 investment will have an after tax cost of $12,000 reflecting just $3,000 of depreciation tax benefit.
Section 179 and Bonus Depreciation are incentives designed to benefit small businesses. I encourage you to review your specific situation with your tax advisor and consider these incentives to help reduce your 2017 tax exposure and minimize your total after tax costs.
About Patriot Capital
Patriot Capital, a division of State Bank and Trust Company, specializes in enabling entrepreneurs to succeed by providing hassle free equipment financing in the retail and commercial fueling verticals and other retail and manufacturing industries. Working with its customers to enable them to optimize their financing and capital structures, Patriot Capital is the leading provider of capital equipment financing and leasing to NACS (National Association of Convenience Stores) and SIGMA (Society of Independent Gasoline Marketers of America) members.
Patriot Capital, a division of State Bank and Trust Company does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. All examples are for illustration purposes only.