All businesses wishing to remain competitive in their respective markets minimize their tax liability to increase profitability. Having more money to put back into a business by saving on taxes is an easy way for businesses to thrive and pull ahead of other companies that aren’t as knowledgeable about the tax regulations and opportunities that exist. Currently, existing tax laws provide businesses with an incentive structure to invest in expensive tangible assets. The Tax Cuts and Jobs Act of 2017 (“TCJA”) added many tax incentives for businesses to capitalize on, but time is running out to get the most out of the new changes. Here’s what you need to know about the tax benefits to capitalize on this year.

Section 179 Deductions

Section 179 of the Internal Revenue Code allows businesses to deduct certain tangible expenses up to $1 million in the first year it’s purchased. The TCJA increased the amount available for deduction from $500,000 to $1 million and the phase-out threshold from $2 million to $2.5 million. Typically, in a phase-out, taxpayers’ available deductions will be incrementally lowered as they get closer to the $4.5 million cap until they have a minimal tax break or no break at all. Raising the threshold allows businesses to deduct more because those deductions don’t begin to phase out until later. As a result, businesses would be able to deduct a significant amount of otherwise depreciable assets in the first year, saving them a lot of money in taxes.

Bonus Depreciation

FundsNet Services

Bonus depreciation allows a business to deduct a large portion of the purchase price of an asset upfront. The rest of the cost would be left to be depreciated over time. However, the TCJA created 100% bonus depreciation, allowing a business to deduct 100% of the cost of an asset purchased and placed in service before January of 2023. After January 2023, the bonus depreciation will decrease by 20% until there’s no more bonus depreciation in January 2027. The change to bonus depreciation was done to encourage capital expenditures amongst businesses.

Qualifying Assets for Bonus Depreciation

To deduct the cost of an asset with bonus depreciation, the asset must be placed in service by the business, meaning it needs to be ready and available for a specific use, but does not need to be actively used. The asset must also be new to the business, meaning that it cannot be something that was already owned but started being used for business purposes. The TCJA also included the purchase of used items in bonus depreciation, so used vehicles, equipment, and other items would qualify for the deduction. Finally, the asset must have a useful life of under 20 years to be eligible for bonus depreciation.

Why Use Section 179 or Bonus Depreciation

Section 179 and bonus depreciation could have significant tax ramifications on a business if used properly. Bonus depreciation provides businesses with a substantial tax-saving opportunity because it doesn’t have some of the limitations of Section 179. Section 179 has a numerical limit on how much could be deducted in the first year. However, bonus depreciation deducts a percentage of an asset’s cost, and that can be utilized in conjunction with Section 179. Also, bonus depreciation, unlike Section 179, can create a net loss, which can be carried over into the next year to offset any gains from that year. If an asset’s cost surpasses the annual limit of Section 179, then it can be deducted with bonus depreciation to avoid hitting the max deduction limit, as long as it is eligible for bonus depreciation. If both options are used to their fullest capacity, the business can obtain the best possible tax benefits.

How to Capitalize on the Available Tax Benefits

Housing.com

Businesses should aim to make their large capital expenditures before the end of 2023 to make it eligible for the 80% available bonus depreciation. The longer that businesses delay purchasing tangible assets that qualify for bonus depreciation, the less benefit they would receive from it. If an asset isn’t put into service before the end of 2023, the bonus depreciation available on it would be down to 60%. Eventually, the bonus depreciation would not be worth much to businesses until they reached their limit using Section 179. Business owners should re-evaluate their financial plans and determine if any asset could be purchased ahead of time to get more tax savings from it. Lowering a company’s taxable income is always beneficial, and obtaining these key deductions early could set up a company for financial success in the long run.

https://www.usbank.com/financialiq/improve-your-operations/industry-insights/Maximizing-your-deductions-Section-179-and-Bonus-Depreciation.html#:~:text=The%20rules%20allow%20Bonus%20Depreciation,and%200%25%20beginning%20in%202027.

https://sharedeconomycpa.com/blog/bonus-depreciation-phase-out-2023/

https://controllerscouncil.org/what-controllers-need-to-know-about-the-2023-changes-to-depreciation-rules/

https://tax.thomsonreuters.com/en/glossary/bonus-depreciation

https://www.experian.com/blogs/ask-experian/what-is-phase-out-range/

https://www.irs.gov/pub/irs-news/fs-06-27.pdf

Online businesses have made life significantly more convenient for people worldwide. Today, thanks to E-commerce, buyers can go online and find almost anything they want and have it shipped to their homes with relative ease.

E-commerce, defined as buying and selling goods and services through the internet, has been growing and evolving exponentially. Entrepreneurs all over the world have benefited from the growth of e-commerce, and they’re able to sell goods and services with far more efficiency than ever before. While there are many models of e-commerce business practices, dropshipping has emerged as one of the most popular and attractive ventures for new entrepreneurs.

What is Dropshipping?

Dropshipping is a business model that enables retailers not to hold any inventory but still sell products. The retailer would get an order from a customer, and they would have a supplier for a product send the product straight to the consumer.

Samantha Lee/Business Insider

The business model is so attractive because of the low start-up costs, ease of making an online store, and the convenience of not having to worry about inventory, shipping, or handling. Instead, they can focus on building a store, finding products, and gaining traffic. They can rely on their supplier to fulfill their orders. The business model can be operated from one individual’s laptop and is very flexible and scalable. Dropshipping sounds straightforward, but it isn’t as simple as many entrepreneurs believe it to be.

The Misconception About Dropshipping

Dropshipping can be a very lucrative and accessible business, with relatively low barriers to entry, making it a highly competitive industry. However, most entrepreneurs that utilize this business model do so without considering any of the legal ramifications that could come from their online business activity. Plenty of businesses use the dropshipping business model in unethical and borderline illegal ways, and they have no idea that they are partaking in wrongful actions. Many entrepreneurs believe they don’t need to worry about legal issues until their business grows and they start making a larger profit.

They are grossly mistaken.

The dropshipping business model and community tend to encourage the practice of “asking for forgiveness instead of permission,” and many entrepreneurs in this field are violating regulations regarding operating businesses in America. By continuing down that path, these businesses are exposing themselves to considerable risks and liabilities. Below are some of the common legal risks that come with dropshipping.

Harvillelaw.com

Product Liability- Many entrepreneurs sell products they haven’t touched or seen in person before, especially when they first start dropshipping. This is problematic because even though the entrepreneur does not handle manufacturing or shipping, they could still be held liable for any harm the product does to the consumer. Product liability in the U.S. is a strict liability tort, meaning the entrepreneur could be held liable regardless of their intent or knowledge of the product’s deficiency.

To make matters worst, the entrepreneur would be held personally liable for the harm done by the product if they do not have a registered entity that shields them from liability. Many entrepreneurs don’t bother registering their online businesses and look for the fastest way to get started. They fail to realize that they have just created a business entity that provides them with no liability protection. If they’re sued, they could lose everything their business has and all their personal assets as well. Getting a dropshipping business registered as an entity that shields personal assets from consumers should be done before any products are marketed, especially if the product hasn’t been vetted.

Lauren Cordray/Equinox

IP Infringements- When entrepreneurs start dropshipping, they use existing photos, videos, and reviews to make advertisements and build out their online store’s product pages. This is rarely done with the original creator’s permission, so it violates U.S. copyright law. Those images and videos are the intellectual property of the original creator, and their explicit permission is required before it’s used. It would be best for entrepreneurs to create their own images and videos of the product by buying it and taking their own photos. Still, many don’t have the budget to produce their own content. But, regardless of cost, businesses should not use product content without permission.

Dropshipping products that are clearly branded will also get entrepreneurs into trouble. Companies like Disney are very quick to send out cease-and-desist letters or to sue businesses that use any of their copyrighted materials. Many suppliers from other countries will manufacture and sell products that violate copyright in the U.S., so it’s best not to try and dropship them.

Tax Implications- Everyone knows we need to pay a tax on all income gained in a taxable year. However, entrepreneurs need to be aware of their state’s tax policies and how many times per year they may need to file, depending on their business structure.

Ethical Marketing/Misrepresentation of Products- As stated above, the dropshipping community uses existing content for advertising products. Sometimes they go as far as to advertise products that aren’t their own or use misleading descriptions when explaining the product’s features and quality. This is an unethical practice, borderline misrepresentation, and could be grounds for a breach of contract lawsuit. Businesses should only market the exact product they’re selling and should avoid being dishonest while describing the product and where it’s sourced.

Navigating the Legal Minefield

forpurposelaw.com

Although there are plenty of legal risks that would make a risk-averse person abandon the dropshipping model, plenty of entrepreneurs will charge onward, regardless of the dangers ahead. It would be wise of them to watch where they step and to consider the risks as they traverse this e-commerce business model. By adhering to regulations from the start and avoiding common mistakes, entrepreneurs can save themselves from the stress of dealing with legal action against them and their businesses.

https://www.shopify.com/blog/what-is-ecommerce

https://www.forbes.com/advisor/business/what-is-dropshipping-everything-you-need-to-know/

https://www.law.cornell.edu/wex/product_liability

https://www.disneydining.com/disney-is-suing-a-kissimmee-business-for-knockoff-disney-merch-and-copyright-infringment-jb1/

https://finchannel.com/dropshipping-risks-how-to-avoid-copyright-infringement-issues/

https://help.shopify.com/en/manual/your-account/legal/dropshipping#:~:text=the%20European%20Union.-,Product%20liability,jurisdiction%20you’re%20selling%20into.

Welcome to my blog!