The recently passed Economic Stimulus Package of 2008 is a $168 billion economic “rescue” package that includes rebates for taxpayers and tax breaks for businesses. Tax rebates, the heart of the package, are scheduled to arrive beginning in early May.
As most people know, the plan includes rebates of up to $600 for individuals and up to $1,200 for couples filing jointly, with an additional payment for families of $300 per child, and a minimum payment of $300 for individuals who pay less than that in income taxes. Payments are reduced for individuals with adjusted gross incomes above $75,000 and couples with incomes above $150,000, with the wealthiest taxpayers receiving nothing.
There are also tax breaks for businesses such as contractors and rural building operations that are retroactive to the beginning of 2008.
Stimulating the economy of your business
The business portion of the economic stimulus package centers on adding or replacing equipment used in the building operation. The package doubles the amount of equipment expenditures a small business can expense or immediately write off on its 2008 tax return from $125,000 to $250,000, with the investment limit increased from $400,000 to $800,000. It also allows a 50 percent bonus depreciation deduction for businesses buying major equipment.
Bonus depreciation equal to 50 percent on new equipment is available, but only if the new property has a depreciable life of 20 years or less. This bonus applies to 2008 purchases only.
The new law also raises the limitations on so-called “luxury” auto depreciation. The cap was originally enacted because lawmakers did not want tax laws subsidizing the use of luxury vehicles by businesses. Because the definition of “luxury” is woefully out-of-date, the new law will allow just over $11,000 as first-year depreciation on business-use vehicles in 2008.
As with many options in the tax laws, each builder and contractor will have to decide for him- or herself if the new limits will aid in stimulating the economy of their building business/operations.
Generally, the cost of equipment used in the building operation is recovered via depreciation deductions spread over the useful life of that equipment. Under current rules, an expense deduction, in other words, an immediate write-off is available for builders or contractors who choose to treat the cost of newly acquired equipment and property, called Section 179 property, as an expense rather than a capital expenditure.
Thus, in lieu of depreciation deductions spread over a number of years, the tax rules allow builders or contractors with sufficiently small amounts of annual investment the option of deducting (or expensing) equipment and property under Section 179.
In general, property qualifying for this immediate deduction is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business.
This has meant the cost of equipment and, in some cases, software can be claimed as an expense on the annual tax return rather than depreciated over a number of years. Originally designed to encourage small businesses to acquire additional property and equipment, the Section 179 write-off has now been raised from the old $125,000 limit to $250,000.
Also increased from $400,000 to $800,000 was the investment ceiling, above which the Section 179 write-off is reduced, dollar-by-dollar, by the amount that total equipment or property acquisitions exceeding that ceiling. Thus, a building operation that purchases equipment in amounts greater than $800,000 for the year will hit the ceiling and find the Section 179 expensing election reduced accordingly.
A bonus depreciation bonus
The other business provision contained in the new economic stimulus package, a 50 percent “bonus” depreciation deduction, is allowed for qualifying new depreciable property placed in service during 2008. The deduction is claimed for the cost of property after reduction by any Code Section 179 allowance. After the cost of that new depreciable property has been reduced by the Section 179 expensing allowance and the bonus depreciation, the amount remaining is depreciated or written-off over the property’s useful life.
Generally, the so-called “major equipment purchases” encouraged by lawmakers do not include buildings. However, structures built as part of equipment, or specifically to house equipment, may have a useful life of less than 20-years and qualify for bonus depreciation.
The label of “luxury” used to designate many of the automobiles used by building businesses and their owners is woefully out of date. For 2007, for example, a vehicle was subject to the limitation if its value was at least $15,100 for passenger automobiles and $16,100 for trucks or vans.
Ordinarily, under the luxury auto rules, the first-year limit on depreciation for passenger automobiles cannot exceed $3,060. However, this limit was increased when bonus depreciation was previously available to $4,600.
The new law raises the cap again, this time to $8,000, if bonus depreciation is claimed. For a qualifying vehicle, a maximum first-year depreciation write-off of no more than $11,060-$11,260, is permitted for vans or trucks. If the vehicle is not predominantly used for business in a subsequent year, then bonus depreciation must be recaptured.
Just say ‘No’ to tax write-offs
It is not easy trying to break a habit of minimizing income and maximizing deductions in order to produce a low tax bill. It is even more difficult when lawmakers tout increased deductions as a cure-all for our economy. Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored altogether.
In addition to a shorter “useful life,” or write-off period, the tax rules encourage investment in business assets by allowing accelerated depreciation. In other words, even under the basic method of depreciation, write-offs are accelerated, greater in the earlier years when out-of-pocket expenses are greater with smaller deductions in later years.
However, neither accelerated depreciation nor the first-year write-off is mandatory. Although depreciation deductions are not claimed, they do “accrue” and figure in the computation for gain or loss when property is sold, abandoned or otherwise disposed of.
Fortunately, a builder or contractor can ignore the standard system of depreciation and choose instead a slower, more even write-off such as the straight-line method. The Internal Revenue Service reportedly looks more closely at any building operation or business choosing an alternative depreciation method such as straight-line depreciation rather than using the no-questions-asked modified asset cost recovery system (MACRS), but the lower tax bills in later, more profitable years, might be worth it.
The limited tax breaks for building businesses under the Economic Stimulus Package of 2008 include a 50 percent bonus depreciation deduction for new equipment, saving businesses an estimated $42.3 million in 2008. Businesses will also be permitted to fully expense (immediately deduct) up to $250,000 of both new and used business property, saving nearly $1 billion.
Left unanswered by lawmakers are a number of questions including: how can a troubled building business afford new equipment or property acquisitions; where will the contractor or builder find financing for additional equipment; and, most importantly, will those new write-off limits and bonus depreciation really stimulate the economy of your building operation?