Will Capital Equipment Be 25% More Expensive Under the Trump Tax Plan?
Chris Santy, President, Patriot Capital
The proposed tax changes by President Trump are an ambitious attempt to deal with both improving the current tax code and stimulating the economy. There are four areas that warrant a closer look as they may make purchasing capital equipment such as gas pumps, underground tanks or beer caves more expensive. These areas are the lower value of capital depreciation, the border adjustment tax, rising interest rates and the potential change in Section 179 accelerated depreciation.
Please note that the proposed changes are subject to the political process, and parts of the proposals will likely be updated or not be part of the final tax code changes. With that said, here are some factors that I think merit consideration for fuel wholesalers and c-store operators.
Lower Capital Depreciation Benefit
At current tax rates, the after-tax cost of a $70,000 investment in equipment, such as four gas pumps, would be $45,500 for a business in a 35% tax bracket. The depreciation of $24,500 would fall to $10,500 at the proposed 15% tax bracket, increasing the after-tax cost to $59,500. This increase of 31% in after tax cost suggests purchasing equipment prior to the tax act implementation may yield a significant net cost saving.
Elimination, or Doubling, of Section 179?
Trump had proposed during the campaign the doubling of Section 179 accelerated depreciation from the current $500,000 maximum $1 million per year.1 Section 179 benefits small businesses, including convenience stores and jobbers, by allowing capital depreciation to be taken in the year of purchase,
At the time of writing the Trump proposal is silent on the fate of Section 179 for either the 2017 or 2018 tax year. The Wall Street Journal reports that Trump’s plan leaves out several significant topics, including whether companies will be able to continue to write off capital expenses immediately.2
Border Adjustment Tax (BAT)
The House Republican tax proposals, also known as ‘The Ryan Plan’, include a provision for a “border adjustment tax.” The border adjustment tax was not part of the Trump proposal. If the BAT is added as part of the Capital Hill negotiations, it will result in a duty being placed on many of the components that are used in C-store equipment. This duty will most likely be passed into the marketplace by manufacturers. Using modest assumptions on the size of the BAT and the percentage of equipment that consists of imported parts, it’s probably that equipment prices will rise by 5% or more to recoup this surcharge.
|Current Tax Plan||Proposed Tax Plan|
|BAT Impact (5%)||$3,500|
|Section 179 Deduction||($24,000)||($11,025)|
|After Tax Equipment Cost||$45,500||$62,475|
Rising Interest Rates
If the tax changes are implemented, they are designed to stimulate the economy. The FED has already signaled a desire to get interest rates back to ‘normal’ levels. Any wind in the sails of the economy in terms of growth will likely result in the FED moving more aggressively on raising interest rates. This will result in borrowing rates for both senior lines of secured credit and equipment financing to rise. The impact of a 1% increase in interest rates on a 5 year, $100,000 financing agreement is an additional $2,300 over the term of the loan.
The proposals in the Trump Tax Act are, at this stage, only proposals. However, many gas stations are faced with significant investments over the next few years to meet EPA tank (UST) regulations, EMV payment at the pump, rebranding and other expenses.
Combining a lower depreciation benefit, higher costs and interest rates with the potential loss or modification of Section 179 may equate to much higher after-tax equipment costs. Now is a good time to review your purchasing plans for your sites for new gas pumps, underground tanks, and other C-store equipment, to determine the best time to move ahead. Meeting with your accountant now could result in significant tax and cost savings compared to waiting.
The opinions in this article are the personal opinions of the author and do not represent opinions or advice of Patriot Capital or State Bank. 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.
About Patriot Capital
Patriot Capital is a PMAA Gold Partner.
Patriot Capital, a division of State Bank and Trust Company, specializes in enabling entrepreneurs to succeed by providing hassle free equipment financing to retailers in the convenience store and commercial fueling industry and other retail and manufacturing industries. Patriot has been recognized as Best in U.S. by the PMAA, Petroleum Marketers Association of America.
Patriot Capital is the leading provider of capital equipment financing and leasing to NACS (National Association of Convenience Stores), PMAA and SIGMA (Society of Independent Gasoline Marketers of America) members. State Bank is a Member FDIC.
- Accounting Web - trumps-victory-could-lead-to-big-tax-law-changes