Situation:
Lindsay is an entrepreneur who started a staffing agency helping restaurants with staffing issues by having a team of “on-call” wait staff, cooks, and busboys. Lindsay did not realize how fast her agency would scale up, and she was able to open three offices in the Phoenix area in the first three years.
Lindsay’s agency has contracts with several national chain restaurants looking for her to expand into other areas of the country. Lindsay will open two more offices in Texas and Washington. After the first year of operation, she projects that each new office will increase her agency’s profits by $1,500,000.
This year Lindsay’s agency is projected to make a profit of $3,600,000. Lindsay is concerned about the agency’s tax liabilities. Lindsay met with her financial advisor to go over her concerns and how to plan for her agency’s potential tax issues. Her advisor discussed some exclusive tax mitigation strategies and how Lindsay may be able to relieve some of the tax burdens she is facing.
Solution:
Based on Lindsay’s projection, her Limited Liability Company will earn $3,600,000 in pre-tax profits for 2023. She will owe 40% in state and federal taxes, resulting in a tax obligation of $1,440,000. Lindsay’s advisor recommended that she participate in a tax mitigation strategy that combines Section 179 expense and Section 168(k) bonus depreciation deductions.
Lindsay will purchase eight Small Advantage portable homes for a total of $480,000 equity from her agency and a $1,920,000 loan provided by the manufacturer. Lindsay will split the small homes between Section 179 and Section 168(k) to maximize her deductions.
Lindsay will purchase three units totaling $180,000 equity, generating an expense of $900,000 under Section 179. The five remaining, totaling $300,000, will be written off under Section 168, resulting in a first-year deduction of $1,200,000 and a deduction of $75,000 in years 2 – 5.
Result:
As a result of utilizing Section 179 combined with Section 168(k), Lindsay will be able to decrease her agency’s tax liability significantly over the next five years. In year one, Lindsay will use Sections 179 and 168(k) to deduct $2,100,000, reducing the tax obligation in the first year to $600,000. In years 2 – 5, Lindsay will have total deductions of $75,000. Lindsay has a net gain of $360,000 in the first year, with a total net gain over five years of $480,000.