Editor’s note: based on the reported volume of sales during the recent Conexpo-Conagg show, it would seem that a lot of contractors have decided to take advantage of the opportunities afforded by the package.
Not many are complaining about the personal tax rebate that most taxpayers will have received in 2008 with ESA. The plan is to prime the pump of the national economy in general with $300 to $600 per person tax rebates, for those who qualify. The guess is that people will spend, rather than save, what they get.
But two key provisions in the business side of the new stimulus plan mean that construction business owners may choose to benefit when purchasing capital assets ranging from bull dozers to office copiers. And small business owners could also gain from nearly a doubling of the dollar amount on equipment that can be expensed. But the window of opportunity for benefiting from the new business rules is short—it is only open during 2008.
The following are generalized summaries. Professional tax advisors and business planners should be consulted for specifics geared toward each business owner.
Key #1: 50-Percent “Bonus” Depreciation
Under the old depreciation rules, a “$1 million dollar piece of equipment might depreciate 10 percent each year for the next 10 years, but under the Economic Stimulus Act of 2008 a business can take a 50 percent depreciation during the first year,” says Ron Riecks, manager of Wells Fargo Construction www.wellsfargo.com. This is a big tax savings that frees-up money to be invested this year in even more needed new equipment.
Example: Buy $1 million worth of equipment in 2008. New rules allow you to deduct 50-percent of that ($500,000). Then, regular yearly deductions (e.g. 20-percent per year MACRS) kick in on the remainder for the year (that’s another $100,000 off). So, $500,000 + $100,000 equal a total $600,000 depreciation deduction for the first year of this new equipment. That is quite a heavy incentive to free-up capital for other expenditures.
Equipment of all types— computers, trucks, trailers, office equipment, software, and specifically, construction equipment, including dozers, loaders, graders, cranes, etc., qualify, he adds.
“Essentially, any kind of capital equipment that an infrastructure (or other) contractor would use to complete a job can receive the benefit of the bonus depreciation,” according to Riecks “There is no dollar limit assigned to the bonus depreciation provision”
He adds this bit of advice to construction businesses: “I'd encourage businesses to think about their purchases and talk to their financial and tax advisors early in the year. Don't wait until the end of December to try and take advantage of the tax benefits -- make that equipment work for you all year long.”
Commerce Clearing House (CCH), the oldest tax information provider in the U.S., on its website (www.cch.com) adds:
To be eligible to claim bonus depreciation, property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. The property generally must be purchased and placed in service during 2008. Thus, the original use of the property must begin with the taxpayer and must occur after December 31, 2007, and before January 1, 2009.
It points out that trucks and vans, luxury autos, and some aircraft may also be eligible for the new bonus depreciation rules.
Key#2: Enhanced Small Business Expensing (Sec.179)
Old rules: Buy $510,000 of capital assets, deduct first $128,000
New ESA rules: Buy up to $800,000 capital assets, deduct first $250,000
(Small businesses generally are in the range of earning up to $2 million annually, according to Wells Fargo).
“Hypothetically, if a (small) business purchases a $700,000 Crane, then under Section 179, it may deduct up to $250,000 in equipment expenses, until they purchase more than $800,000 in equipment,” Says Riecks. “So, with a $700,000 purchase they could deduct $250,000 for that piece of equipment, plus one year of the remaining depreciation. Equipment purchases over $1,050,000 are not eligible for the expense reduction.”
Again, Riecks emphasizes it is important that businesses consult their tax advisor to determine just how the Economic Stimulus Act can benefit them before making a purchasing decision.
Double Dipping Allowed
There is more good news for the small construction business owner under the new ESA. According to National Association of Manufacturers www.nam.org and Deloitte www.deloitte.com, small businesses not only get the benefit of this sec.179 expensing increase, but they may also participate in the 50 percent Bonus Depreciation windfall. That is very significant news for anyone whose business qualifies.
The ESA rules of course are not limited to construction industry businesses, but apply to all U.S. businesses and manufacturers. Across the board, this is expected to stimulate otherwise hesitant business owners into ordering new equipment. Historically one-time government-allowed tax incentives—such as immediately post 9/11—have stirred economic growth within the first six months of enactment.
In view of the current U.S. economic conditions, the question is whether this generous set of tax deductions and depreciation incentives is likely to spur small construction companies to purchase more equipment in 2008, or is the overall economic climate too risky for such a decision?
“The Economic Stimulus Act is designed as an incentive for businesses,” says Riecks. “I think it will serve to tip the scales for those businesses that were thinking about purchasing equipment, but were unsure because of the economic climate and prepared to hold back for another year or so. This might just be that extra push they need to make that purchasing decision. However, for those businesses that weren't contemplating any equipment purchases, the incentives may not be enough to make them consider a new purchase.”
But another question remains. Will some areas of construction in the U.S. be more reluctant than others? For example, California is facing strict CARB regulations for off-road diesel equipment and many may not be able to afford investing in new equipment until Tier 4 gear is available.
“Our own research (Wells Fargo Construction Industry Forecast 2008) indicates that construction activity still varies quite a bit at the regional level,” Riecks adds. “Some areas remain strong, while others are a little softer. For California, specifically, this could be an incentive to reduce the average age of their fleet and potentially, position them to meet the new CARB requirements. It all comes down to the specific equipment needs for each business.”
Next Move? 5 Tips from Wells Fargo Construction
- Think about what equipment investment will position your business for economic growth and productivity. Is it a specific piece of machinery, a storage facility, technology, heavy-weight business vehicles, an airplane or a tractor?
- Evaluate the equipment currently being utilized by your organization and see if you could benefit from updating, supplementing or replacing equipment that gets used on a regular basis or from expanding the capabilities of your business.
- Add up your potential equipment purchases. The amount you spend and the types of equipment purchased will determine the extent to which you are eligible for one or both of the tax incentives.
- Is buying or leasing right for you? Talk to a banker, they can help you determine financing options and the 2008 stimulus package could have an impact on leasing rates you might want to consider.
- Before making a purchase talk to your accountant or tax advisor to learn how these tax incentives can work for you.