Capital expense write-offs now harder to come by for North Bay businesses with tax law changes

While U.S. House Republicans voted on Tuesday to reduce funding to the Internal Revenue Service, North Bay accountants, companies and trade groups entered a new tax year dealing with a reduction of their own.

As of Jan. 1, business can no longer write off 100% of capital equipment expenses, like farm equipment. A full write off was allowed under the 2017 Tax Cuts and Jobs Act. Now, the deduction will be decreased 20% each year until it is gone.

The weaning away from the benefit prompted a bit of a rush last year to buy equipment that business executives in some circles knew they would eventually need to get, said some area accountants.

“I’ve heard of some taking advantage of their ability to write off the depreciation for capital equipment, but everybody’s situation is different,” Napa County Farm Bureau CEO Ryan Klobas said.

Companies such as farms have relished using the write-off because it was immediate and applied to both new and used equipment.

“It’s been 100% since 2018. (The change) was designed to change corporate tax rates to bring in revenue (to the federal government),” Santa Rosa Certified Public Accountant Jon Dal Poggetto said. “In 2027, it will be obsolete.”

There are alternative ways to get the full write-off for capital equipment,” but it comes with a few caveats that makes it more limiting who can take it.

“The trouble with it is you have to show you’ve made a profit (to use the write-off),” he said.

Moreover, Moss Adams CPA Kirk Faris contends the “rules are more limiting” in how much may be deducted.

And for companies that conduct research and development, the tax law which came into play Jan. 1 requires companies wait to take their full research deduction for the year the expense occurred. Now that expenditure must be spread over a five-year period, so they have to wait to receive the whole benefit.

Faris cited another “negative change” for companies going into 2023 seeking provisions.

“The big change is the definition of adjusted tax income,” he said.

Companies that pay interest payments on business expenses have traditionally written them off on tax returns. Now, there’s a cap, and that makes borrowing more expensive. Interest on debt can’t be deducted to the extent a company’s net interest expense exceeds 30% of its adjusted taxable income, which is simply put — a business expense.

Then, there’s understanding it all.

“My clients would love to have IRS responsiveness. It’s been a huge challenge,” Faris said.

As the tax season approaches, the agency itself is under attack and may end up struggling to keep up with the demand given staffing levels.

The U.S. House of Representatives, under a new Republican leadership, voted 221-210 to delete $71 billion from the IRS, money earmarked to help the agency find tax cheats, the Washington Post reported Jan. 9.

To this, the U.S. Treasury Department issued a response to the Business Journal: “The IRS audits nearly 80% fewer millionaires than a decade ago, and this legislation would deny the agency much-needed resources to hire top talent to go after the $163 billion in taxes avoided by the top 1% annually.”

Editor’s note: This story was updated to reflect a response from the U.S. Treasury Department.

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