Tax Time - Are You Optimizing Your Capital Depreciation?
Many C-store operators miss out on tax savings – and are at risk of missing another benefit soon
By Chris Santy, President, Patriot Capital
Published in SIGMA IGM Magazine, May-June 2017 edition
Every year at this time, business owners reflect on the taxes that they are paying. A recent Wall Street Journal article1 highlighted the fact that the average tax rate for larger U.S. corporations is 21.2%2, noting “most mid-size and smaller firms pay much higher rates.”
One tax strategy that gas stations can use to lower their taxes and improve their cash flow is Section 179. This tax incentive enables those purchasing new or used capital equipment or making site improvements to capture benefits in the current tax year.
As part of "The Protecting Americans from Tax Hikes Act of 2015," Section 179 was made a permanent part of the tax code. I’d like to highlight that although Section 179 is a permanent part of the tax code, there is discussion in Washington of a significant overhaul of taxes, which may result in modifications or elimination of this section.3 These benefits, since being increased to $500,000 in 2010, have helped convenience-store operators capture significantly accelerated depreciation for capital improvements and fueling equipment purchases, including gas pumps and underground storage tanks.
What is Section 179?
Section 179 is a section of the federal tax code that allows small businesses to accelerate the depreciation of their capital and equipment spending, and even some business software, in the current tax year. Though the credit was historically $25,000, Congress – in a bid to expedite America’s recovery from the recession – increased it temporarily to $500,000 in 2010 and made the change permanent in 2015.
This is a true ‘small business’ tax incentive, applying to businesses with annual capital spending of less than $500,000. For businesses that spend up to $500,000 on either new or used equipment, 100 percent of the investment may be deducted in the current year.
If a retailer used Section 179, a $500,000 spend could yield $175,000 in cash-flow benefit in the year the equipment was purchased.4 Combining this with equipment financing could create positive cash flow for almost two years. The first-year tax savings is $145,000 greater than what could be gained from standard equipment depreciation.
Here’s an example that illustrates the impact of Section 179 for a typical convenience store or gas station:
The net effect of Section 179 is that your first year after-tax cost of $500,000 of equipment is $325,000. This strategy also could be used for gas pump upgrades costing $100,000. In this case, your first year after-tax cost would be $65,000.
Capturing 100 percent of the available depreciation in the first year is a strong incentive to purchase new equipment, especially in an environment of tax code uncertainty, and rising equipment prices and interest rates.
Purchases covered under Section 179 include EMV gas pumps and retrofit kits, in-store equipment such as beer caves or fixtures, and energy efficiency improvements, including LED lighting and HVAC equipment.
If you lease rather than own, your building, you also may deduct limited structural changes – such as interior walls and doors – under Section 179.
Another Tax Change in the Offing?
One of the most talked about changes to the tax code is the reduction of corporate taxes to 15 percent. Although most of the press has been focused on the stimulative impact of this change, there is a flip side that you should consider in your planning.
Today, if you purchase $100,000 of equipment and are in a 35-percent tax bracket, your after-tax cost of equipment is $65,000. If the tax code is changed to 15 percent, your after-tax cost will increase to $85,000. This is effectively a 30 percent increase in the cost of the equipment to your business.
If you are planning to purchase new equipment and are weighing the right time, I encourage you to talk to your accountant and get his or her perspective on the best strategy for your business. We are entering a period of turbulence in tax rules, and making sure you understand your options is time well spent.
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 upon for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Patriot Capital, a division of State Bank and Trust Company
Richard Browne, Vice-President Marketing,
- Patriot Capital does not provide tax advice or guidance. Please contact your tax professional or CPA for information regarding your specific situation.
- Example assumes a 35-percent tax rate.