Tax Reform – What’s in Store?

2018 combines many factors that make investing now a good opportunity

Richard Browne, Vice-President Marketing, Patriot Capital

Several factors are coming together to make 2018 the best year in a long time to invest in new pumps, tanks or other equipment.  The combination of current economic conditions with the benefits of the 2017 Tax Reform Act creates a situation that might not be repeated.

The combination of lower tax rates for many companies, the opportunities to capture immediate tax benefits from investment in new equipment, low inflation and low interest rates all contribute to this opportunity.

With the 2017 tax reform bill, Section 179 and Bonus Depreciation incentives have been significantly expanded.

Section 179 changes for 2018
In the 2018 tax year, a permanent increase in the annual deduction from $500,000 to $1,000,000 takes effect. Section 179 covers both new and used equipment, including most fueling and convenience store equipment.  Section 179 eligible equipment has been expanded to include improvements to nonresidential property (HVAC, roofs, etc).  Additionally, the maximum eligible amount of $1 Million will increase based on an inflation index starting in 2019.

2018 Changes to Bonus Depreciation

The most significant changes in bonus depreciation are the removal of the previous $2,000,000 cap and the 50% deduction allowance.  With the new tax bill, most equipment placed into service after Sept. 27, 2017 can qualify for 100% deduction under this tax treatment, potentially creating cash flow benefits. The provisions are in full effect (100% deduction) through December 31, 2022 and are scheduled to phase out through December 31, 2026.

Other considerations for planning equipment purchases

We are at the intersection of several beneficial points in the economic cycle.

Firstly, interest rates are currently still low compared to historic norms.  The FED has signaled their intent to raise rates three times in 2018, and expectations are for continued rate increases in 2019.  As these increases come into the market, borrowing costs for operating lines of credit and other variable rate financing tools will increase.

We have also had a period of low inflation for the past couple of years.  If the tax act has its desired effect of increasing economic activity, it’s likely that manufacturers will see an opportunity to raise prices based on this stronger demand.  This may be especially true for gas pumps, with very strong demand forecast for EMV pump upgrades between now and the EMV liability shift in 2020.

The third consideration is rising labor rates.  With a market that was generally considered at or near full employment in 2017, any GDP growth will result in pressure on wages.  Increases in wages will move into the economy in the form of higher technician costs for installing new equipment and higher prices for equipment.

The last wild card is the mid-term elections in 2018 and the 2020 election.  If there is a change in the current balance of power, all bets may be off on future tax and economic policy.

Combining the 2017 Tax Reform Act benefits with today’s low inflation, low-interest rate environment may make 2018 a good time to invest in upgrading your site.

Please consult your tax professional for advice related to your specific situation.  Patriot Capital does not provide tax or accounting advice.

Richard Browne is Vice President, Marketing, Patriot Capital. Contact him at richard.browne@patcapfinance.com. Based in Atlanta, Patriot Capital specializes in enabling entrepreneurs to succeed by providing hassle-free equipment financing to retailers in the convenience-store and retail-petroleum fueling industries. Follow Patriot Capital on Twitter @PatriotCapital. Patriot Capital is a division of State Bank and Trust Company.  Member FDIC. The opinions expressed in this article are those of the author.