There are still plenty of questions and discussions taking place about what to expect in 2024. Management is really under the gun trying to properly budget profits and free cash flow, and at the same time trying to entice customers to buy units and parts and properly maintain equipment.
Speaking of customers, seeing that they are in the same boat you are, are looking for ways to become more efficient through cost reductions and productivity gains, using help from vendors to help them do that. Hopefully, your management teams and OEMs are looking for answers to assist customers and are passing along those ideas for you to pass on to existing and prospective customers.
Do you think customers would appreciate finding some potential cash that could be used for Cap-X purposes? Sure, they would. And would it not be great if you helped them find that cash?
Believe it or not, some anticipated tax plays are coming about that I am assured will pass, and if they pass could provide immediate benefits in terms of tax payments.
There are changes regarding:
- Bonus Depreciation
- Section 179
- Interest Expense Limitation
- Contractor Employee Status
The Tax Cuts and Jobs Act allowed 100% Bonus Depreciation starting September 27, 2017, and before January 1, 2023. So up through 2022. Starting in 23 the Bonus Depreciation would phase out at 20% per year until 2027. After that, it is back to normal tax depreciation methods. THE PROPOSED LAW EXTENDS 100% BONUS DEPRECIATION THROUGH JANUARY 1, 2026, WITH THE PHASEOUT BEGINNING THE YEAR AFTER.
What is great about this is your ability to go back and use 100% for 2023. If you were basing your estimate payments using an 80% bonus to calculate taxable income, you can now adjust that annual result for the additional 20% you can adjust for. And of course, planning for 2024 would also include numbers using a 100% bonus. Of course, each company has its unique tax situation or position, and even with the changes, there are no general significant benefits.
SECTION 179 is amended to increase the limit on Depreciable Business Asset expensing. For property placed in service after December 31, 2023, taxpayers can expense up to $1.29 million, reduced by the amount of cost of qualifying property over $3.22 million, adjusted for inflation.
In terms of Business Interest, the proposal extends the use of EBITDA for purposes of regarding the limitation of the deduction for business interest. This amendment applies to tax years beginning after December 31, 2023 and will run through December 2025.
These tax changes are positive for every dealer out there, but also very positive for customers who were not quite sure they wanted to invest in equipment in 2024. These unexpected funds could be used to buy, make a down payment, or just expand the business with the support of the new equipment. I suggest you put a plan together to discuss with customers to see where they stand on this issue.
CONTRACT EMPLOYEE STATUS. This issue continues to tighten up because both tax and legal issues are involved to the point where not properly reporting payments for work could result in material taxes and penalties. We now have an economic reality test for determining workers’ status under FSLA. This new rule rescinds the 2021 Independent Contractor Rule and becomes effective March 11, 2024.
There are now six factors to determine if a person is an employee or independent contractor:
- Any opportunity for profit or loss a worker might have.
- A financial stake or resources the worker has invested in the work.
- The degree of permanence of the work relationship.
- The degree of control an employer has over the person’s work.
- Work is essential to employers’ business.
- A factor regarding the worker’s skill and initiative.
If the worker is an employee there are tax withholding requirements, as well as payroll taxes paid by both the worker and employer. Base pay and overtime, if earned, would also be included in the process. Then there are the Federal Unemployment Tax implications. And there could be benefits provided to employees. I am reminded that the contractor “payroll” may wind up being included for WC and General Liability insurance unless you notify the insurance company to not include the contractor expense. Contractors should supply an insurance certificate to the company. All I see here is a lot of exposure if you guess wrong.
One other recent tax topic concern Limited Partner Status for SECA Tax (Self-employment tax). Since limited partnerships are popular these days, I thought I would throw this in to make you aware that if you participate as a limited partner the exemption requires a functional analysis of whether a partner was, in fact, active in the business of the partnership and a limited partner in name only. So, if you receive profit distributions from a limited partnership take steps to decide whether you are a limited partner or one active in the operation of the business. Document your functional analysis review.
I believe a review of these topics with customers will be appreciated even though they have no additional funds coming. Will anyone else discuss these topics with them?
About the Columnist:
Garry Bartecki has been a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail [email protected] to contact Garry.
