Could purchasing a vehicle reduce your taxes?
Are you considering purchasing a vehicle anytime soon, or have you already purchased one this year? Did you know that a business owner could receive tax benefits for buying a vehicle? The Internal Revenue Service (IRS) has set guidelines for business owners to claim these tax benefits under Section 179 of the Internal Revenue Code. Before you start calling your local car dealership and start negotiating on a new Corvette, you need to understand that there are a few rules and limitations to this.
Section 179
Section 179 of the U.S. internal revenue code allows businesses to take an immediate expense deduction on equipment, vehicles, and software for the given tax year. By utilizing Section 179, business owners can immediately reduce their tax burden, whereas capitalizing and then depreciating the asset will amount to smaller deductions over a longer period of time. For the fiscal year 2022, business owners can deduct up to $1,080,000 on qualifying equipment, and the limit on equipment purchases has increased to $2,700,000. Generally speaking, for a vehicle to qualify for the Section 179 tax deduction, there are rules you should keep in mind. One such rule is that the vehicle must be used at least 50% of the time for business-related purposes. Another limitation is that the Section 179 deduction cannot exceed your annual net taxable income, and the vehicle must be put into service or used for business purposes in the calendar year you buy it before December 31st. Vehicles can be categorized into two categories for tax benefits.
Small Vehicles
Millions of small businesses, independent contractors, and gig workers use small vehicles daily. The vehicles usually consist of passenger cars, crossovers, and small utility trucks. For a vehicle to be categorized as a small vehicle, it must weigh under 6,000 pounds and meet the rules mentioned earlier. The Section 179 deduction limit in the first year is $10,100 but can include bonus depreciation which will total the deduction to $18,100. However, the deduction allowance will be reduced if the vehicle is not used for business purposes 100% of the time, proportionate to its usage. For example, if the vehicle is used 75% of the time, the limit is $7,575 ($10,100 x .75).
Heavy Vehicles
A business vehicle must weigh at least 6,000 pounds and no more than 14,000 pounds to qualify as a heavy vehicle. Vehicles that fall under the heavy vehicles category consist of SUVs, vans, and pickup trucks. You can find the gross vehicle weight rating (GVWR), which can be found on the vehicle manufacturer’s label or in the vehicle information package. Section 179 has a deduction cap of $25,000 for heavy vehicles, but business owners can utilize bonus depreciation along with their deduction if they qualify. It’s also important to note that you do not have to purchase a brand-new vehicle for the deduction. The tax deduction qualifies for used vehicles as long as it’s new to the business, and the deduction can also be applied to vehicles that are being financed. It’s best to consult a tax professional to see how much of the deductions you qualify for.
Bonus Depreciation
Bonus Depreciation might seem similar to Section 179, but the two have their differences. Broadly speaking, large businesses typically use bonus depreciation, which is meant to be taken after the Section 179 deductions. Section 179 rules tend to be more flexible with timing than bonus depreciation, as business owners can choose to depreciate the entire value of certain assets immediately or defer a portion for the next tax year. However, bonus depreciation is not capped in regard to dollars. Large businesses can deduct a single multi-million asset in a year. In contrast, under Section 179, businesses are limited to $1,080,000 for year 2022 based on $2,700,000 capital equipment spend. Each program offers different tax advantages to business owners, and depending on the tax year, business owners can choose which option works best for them, if not both. Remember that to claim the tax benefits of Section 179 and bonus depreciation; you will have to fill out form 4562, as Section 179 and bonus depreciation are not automatically applied. It’s best to consult with your tax advisor so you can choose the best strategy that can benefit you the most.
Read MoreShould you lower the asking price?
Whether you’re selling a car, a house, or a business, it’d only make sense that you’d want to sell for the highest price possible. However, when it comes to selling a business, asking for the highest possible price doesn’t necessarily mean more. There are many variables when it comes to determining the valuation of a business and even unexpected and unforeseeable variables when it comes to selling a business. Some of these variables are not within our control, nor is it something we can factor out when it comes to selling businesses. Some of the things a seller controls when selling their businesses are the asking price, the timing, and how they choose to sell their business.
Variables
Some of the most common variables when determining a business valuation for the purpose of selling are the profitability of the business, assets, the sector the company is in, owners’ hours, etc. Those are variables associated directly with the business, but some variables affect the valuation and the purchase price of the company that is not directly tied to the business itself. According to recent Market Pulse reports (a quarterly survey of market conditions for businesses sold in Main Street and the lower middle market by the IBBA and M&A Source), macro events have brought certain variables into the spotlight affecting business Purchase Prices.
- Labor Shortages
- Supply Chain Disruption
- Interest Rates
- Inflation
- Market
If we look at the charts below, we can see how these variables, such as inflation and interest rates, have affected purchase prices for businesses, which will factor into business valuations as markets adjust.
(Above is a data chart of CPI provided by the U.S. Bureau of Labor Statistics)
(Graph of fed interest rate from Oct 1st, 2021 – Sep 1st, 2022)
These variables can have a ripple effect as buyers, sellers, and advisors must adapt to the changing market conditions. As these variables impact a business’s profitability and the sellers’ net income, the businesses’ valuation and the purchase price will be adjusted accordingly, thus changing median multiples across the market.
We can see how much of a difference there was when comparing Q2 of 2021 and Q2 of 2022. It’s important to note that these multiples are median, and the multiple will vary depending on the industry. After reviewing these charts, we can see how these variables affect business purchase prices. As inflation started rising, it started eating into business profitability and SDE, followed by the fed trying to tame inflation, thus raising interest rates and pushing out once-qualified buyers from the market. As shown in the chart above, business owners who sold their businesses in Q2 of 2021 received a higher price than those who waited to sell for a higher price. On the other hand, business owners that had listed their businesses on the market declined an offer for lower than the asking price and waited for the total asking price to sell for lower than the offer they received previously as the buyer pool and market multiples has shrunk.
So, lower the price?
Although price can and will play a significant role in anything you sell, especially for businesses, you don’t want to leave any money on the table either. Although inflation has caused interest rates to rise and the median in market multiples to shrink, it doesn’t mean you need to lower the asking price immediately. Current events such as labor shortages, supply chain issues, and rising costs have caused buyers to search for “recession-proof” businesses. Depending on the industry and market sector the company is in, the demand from buyers is much higher and is not affected as much or at all, even though the cost of borrowing and market multiples have shifted.
As you can see in the chart above, the top-selling businesses in the market sector of $500k or below were restaurants, while business services were the top sellers in the market sectors from $500k to $2 Million. Finding the correct asking price can be tricky as many variables are involved. Having a reputable business broker and M&A Advisor like V-AID Business Investments assist when selling your business can help determine the valuation of your business and get the best results when it comes to selling your business.
About V-AID
Since 2001, V-AID Business Investment, a team of resilient business brokers and M&A advisors in Dallas, TX, has been specializing in selling small to mid-size businesses in the main street to the lower middle market. V-AID’s experienced team of experts has a proven strategy that will ensure strict confidentiality, a streamlined selling process, and the maximum value for the business. With deep expertise accumulated from hundreds of done deals, V-AID delivers superior results by providing clients with strategic planning and creative solutions tailored to each transaction. Combining V-AID’s proprietary database of buyer networks and industry-leading marketing, V-AID offers a proven selling method that has been the solution to a value-added exit for hundreds of business owners with a completion of 585 transactions totaling over 124 Million Dollars and continuing.
Sources
https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths
https://assets.ibba.org/wp-content/uploads/2022/05/IBBA_Q1_2022_Executive-Report.pdf?_ga=2.58834475.761602016.1663699207-584194243.1663163676&_gl=1*1eghuo5*_ga*NTg0MTk0MjQzLjE2NjMxNjM2NzY.*_ga_WCBM3ZRXC4*MTY2MzY5OTIwNi4zLjAuMTY2MzY5OTIwNi42MC4wLjA.
https://tradingeconomics.com/united-states/interest-rate
Read More
When is the “Right” time? – Now May Be the Time to Purchase Your Own Business
Purchasing a business is extremely tough as you want to find the perfect opportunity that fits your needs and passion. But with COVID-19 affecting all businesses, finding a perfect opportunity is almost impossible when surrounded by an imperfect situation to purchase a business.
Thankfully in 2020, SBA provided a huge incentive to assist in purchasing your own business. Although this helped many individuals to move forward purchasing their own business, the program ended on September 27, 2020. On December 27, 2020, The Consolidated Appropriations Act of 2021 provided additional COVID relief for small businesses. The bill includes limited-time benefits for small business owners seeking SBA 7a financing.
For all new 7a loans that close and fully fund by September 30, 2021, borrowers will be eligible to receive the following benefits:
- 3 months principal and interest payments made by the SBA, capped at $9,000 per month
- No SBA guaranty fee (up to $138,125)
This program allows you to purchase a business through SBA 7(a), 504, and microloans and have SBA pay the first three months principal and interest capped at $9,000/month and the SBA guaranty fee for the Buyer. Do I mean deferred payments? No, SBA is making full payments of principal and interest to your SBA lender for the first three months straight, and you will be no longer responsible for the payments, and there will be no SBA guaranty fee for the purchase.
There is a couple of very important that you should keep in mind to benefit from this great incentive for business buyers:
- The maximum loan amount for this SBA guaranteed loan, primarily SBA 7(a), is $5 million.
- Loans must be submitted to and issued by the SBA by September 30, 2021. In other words, SBA loan number for your loan to purchase your business must be issued to your lender by September 30, 2021.
- It typically takes 60 to 90 days to complete an SBA loan process.
This incentive will allow you as a Buyer to potentially save hundreds of thousands of dollars if you successfully purchase a business within this time frame. For example, for a business being purchased for $1,000,000 based on a 20% down payment at 6% annual interest with a 10-year amortization, your savings will sum up to $26,644.92 for SBA making full payments of principal and interest and approximately $17,550 for SBA waiving guaranty fee.
Any other question? Please feel free to contact V-AID, Business Broker Dallas! We are here to assist you in accomplishing your goals even in this challenging time.
Source: U.S. Small Business Administration
Read More
The Importance of Owner Flexibility
You shouldn’t expect to sell your company overnight. For every company that sells quickly, there are a hundred that take many months or even years to sell. Having the correct mindset and understanding of what you must do ahead of time to prepare for the sale of your company will help you avoid a range of headaches and dramatically increase your overall chances of success.
First, and arguably most importantly, you must have the right frame of mind. Flexibility is a key attribute for any business owner looking to sell his or her business. There are many variables involved in selling a business, and that means much can go wrong. An inflexible owner can even irritate prospective buyers and inadvertently sabotage what could have otherwise been a workable deal.
Be Flexible on Price
A key part of being flexible is to be ready and willing to accept a lower price. There are many reasons why business owners may fail to achieve the price they want for their business. These factors range from lack of management depth and lack of geographical distribution to an overreliance on a handful of customers or key clients. Of course, one way to address this problem is to work with a business broker or M&A advisor in advance, so that such price issues are minimized or eliminated altogether.
Be Prepared to Compromise
In the process of selling your business, you may want to achieve confidentiality and sell your business quickly and for the price you want. However, the fact is that most sellers find that it is possible to have confidentiality, speed, and the price you want, but not all three. Ultimately, you’ll have to pick two of the three variables that are most important to you.
Be Patient
A third way in which business owner flexibility can boost the chances of success is to embrace the virtue of patience. By accepting the fact that businesses can “sit on the shelf” for a considerable period of time, you are shifting your expectations. This realization can help reduce your stress level. The fact is that stressed out owners are far more likely to make mistakes.
Sometimes Losing is Really Winning
A fourth way in which business owners should be flexible is realizing that you and your lawyer will not win every single fight. There will be many points of contention, and a smart dealmaker realizes that it is often better to have a good deal than a perfect deal. You may have to make sacrifices in order to sell your company. Simply stated, you shouldn’t expect the other side to lose every point.
At the end of the day, a savvy business owner is one that never loses sight of the final goal. Your goal is to sell your business. Seeing the situation from the buyer’s perspective will help you make better decisions on how you present your business and interact with prospective buyers. Maintaining a flexible attitude with prospective buyers helps to position you as a reasonable person who wants to make a deal. Goodwill can go a long way when obstacles do arise.
Copyright: Business Brokerage Press, Inc.
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The Main Street Lending Program
There is no doubt that the COVID-19 situation seems to change with each and every day. The disruption and chaos that the pandemic has injected into both daily life and business is obvious. Just as it is often difficult to keep track of the ebbs and flows of the pandemic, the same can be stated for keeping up to speed on the government’s response and what options exist to assist companies of all sizes.
In this article, we’ll turn our attention to an overlooked area of the government’s pandemic response and how businesses can use a whole new lending platform to navigate the choppy waters.
As the pandemic continues, you will want to be aware of the main street lending program, which is a whole new lending platform. It was designed for businesses that were financially sound prior to the pandemic. Authorized under the CARE Act, the main street lending program is quite attractive for an array of reasons. Let’s take a closer look at what makes this program almost too good to be true.
This lender delivered program is a commercial loan. Unlike the PPP, there is no forgivable component. However, the main street lending program does have one remarkable feature that will certainly grab the attention of all kinds of businesses. It can be used to refinance existing debt at a rate of around 3%. With that stated, it is also important to note that businesses cannot refinance existing debt with the current lender. Instead, a new lender must be found. Generally, loans are a minimum of a quarter million dollars and have a five-year term. In another piece of good news, there is a two-year payment deferment period.
The main street lending program can be used in a variety of ways. In short, the program is not simply for refinancing existing debt. Additionally, there is no penalty for prepayment. The way the program works is that lenders make the loans and then sell 95% of the loan value to the Fed. This of course means that the lender is only required to retain 5% of the loan on their balance sheet. The end result is that lenders can dramatically expand the amount of loans they can make.
Whether it is the PPP or a program like the main street lending program, there are solid options available to help you. Businesses looking to restructure debt or put an infusion of cash to good use may find that the main street lending program offers a very flexible loan with great interest rates.
Copyright: Business Brokerage Press, Inc.
The post The Main Street Lending Program appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
