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How to Reduce Potential Tax Liabilities with Capital Expenditure Projects

business and office construction leaders discussing capital expenditures

“Unprecedented” is a strong candidate for the unofficial word of the year for 2020. Business leaders have had to face unprecedented challenges, and, as a result, they’ve had to use unprecedented methods to meet them. For many business leaders, this meant –– at least in part –– applying for government assistance in the form of a PPP (Paycheck Protection Program) or EIDL (Economic Injury Disaster) loan. While these loans may have provided businesses with much-needed injections of cash, capital from these loans may now represent a potential tax liability.

Given that fact, today we’ll explain a little more about how this process works, and what business owners can do to reduce potential tax liabilities with capital expenditure projects.

Loans & Profit

Numbers may not lie, but they also may not tell the entire story either. Such is the case with PPP and EIDL loans. Earlier this year, many businesses applied for government loans at the outset of the COVID-19 pandemic. While the loans required that businesses use most or all of these loans to cover essential expenses (like payroll), this income still counted as a big chunk of profit on their books without any expenses directly against it. Think about it – almost every time you make money in business, you must spend money. So each piece of income has an expense directly against it – thus resulting in some profit. But with these loans, you got a big check that was entirely profit.

For businesses that struggled through COVID and took a loss in other areas of their business, this extra profit on their books isn’t an issue. For the businesses that actually boomed in this period, such as the residential construction and supply industries, their net profit will be inflated with the infusion of PPP monies. These companies have not only made a profit on their regular business, but they also had a large amount of pure profit come with their forgiven loan.

Of course, businesses are responsible for paying tax on their profits at the end of the year. With such a large amount of profit in their business, they could be due for a whopping tax bill at the beginning of 2021.

Capital Expenditures

Business leaders can choose to invest a portion of their profits into “capital expenditures” to cut down on their profit figure. Capital expenditures are considered purchases that businesses make to improve any assets that they own. So when a business makes an investment into a capital expense like updating an office space or investing in new machinery, computers, or office furniture, this can be at least partially written off as an expense with no direct profit related to it. Because of that, it reduces the overall profit figure and, subsequently, the business’ tax responsibility. Unlike operating expenses, which can be written off the same year as their purchase, capital expenditures go through depreciating value on a year-by-year basis. If a business were to make a significant capital expenditure this year, they would be able to deduct some, but not all, of the amount on their upcoming tax balance sheet.

Please reach out to your accountant and confirm that this expenditure would help you before making any plans for capital expenditures.

A Word from Key Interiors

As we begin to wind down a very unusual year, we do like to remind our clients that putting money into capital expenditure improvements can be a great way to reduce potential tax liabilities. Some of our clients have seen this year’s tax payment jump due to receiving PPP or EIDL money from the US Government. Additionally, some businesses may have an urgent need to alter their office setup in order to meet social-distancing guidelines and ensure the safety of their staff and clientele. (For more information on this subject, you can check out our blog here.) Another reason some businesses have needed to alter their set up is because they have gotten much busier and added staff – increasing the need for updated workflows and more bathroom and break room space. Growing businesses may be compelled to rethink their workspace to accommodate this increase in employees or a larger production outlay.

If any of this sounds like it could apply to your business, then we’d be happy to have a no-obligation call to discuss possible projects that fall under a capital expense category.

At Key Interiors, we have a long history of partnering with a wide range of businesses. Our team will work with yours to improve your business’s office and subsequently boost workplace efficiency to deliver significant return on your investment. You can contact us here for more information or to get started today.