A s the deadline for filing tax returns fast approaches, and regardless of whether professional tax assistance is utilized, every rural building contractor and business owner should be aware of the many changes to U.S. tax laws. These changes will affect the tax bill for 2008 and for many years to come.
Early in 2008, the Economic Stimulus Act of 2008 was signed into law, complete with rebates and business incentives. Most noticeable were the “Recovery Rebates,” reaching as high as $600 for individuals and $1,200 for married couples. That new law also included $44.8 billion in business incentives.
For those building businesses that acquire equipment, the new law almost doubled the Section 179, immediate write-off for newly acquired equipment to $250,000 — but only for 2008.
Thus, up to $250,000 of the cost of equipment acquired, and placed in service in 2008, can be treated as a business expense and fully deducted on the tax returns for the 2008 tax year. Should newly acquired equipment costs total more than $800,000 for 2008, the $250,000 Section 179 write-off must be reduced, dollar-for-dollar, for the excess above the $800,000 ceiling.
Another provision in the Stimulus Package allowed builders and contractors to claim a 50-percent “bonus” depreciation allowance for newly acquired equipment. To qualify, the equipment must be eligible for depreciation and have a useful life longer than 20 years. Off-the-shelf computer software and improvements made to leased, business property also qualify for bonus depreciation. Best of all, the 50-percent bonus depreciation applies in both the 2008 and the 2009 tax years.
The Biggie: Fall 2008
Last fall, Congress passed and the President signed into law a historic financial markets rescue bill, the Emergency Economic Stabilization Act of 2008 (EESA). Although the EESA’s primary purpose was to solve the credit crunch in the financial markets, it was also one of the largest tax bills in recent years.
Included as part of that bill were almost 300 changes to tax laws, including tax breaks expected to save taxpayers a whopping $150 billion. While earlier tax law changes shortened the cost recovery period for improvements made to leased business property from 39 to 15 years, the new law extended the faster write-offs for those so-called “leasehold improvements,” until the end of 2009.
What’s more, today retail businesses and restaurants can also benefit from similar shortened recovery periods. That means that building businesses will share in tax savings estimated to reach $8.7 billion over 10 years by utilizing the shorter, 15-year write-off period for more permanent types of improvements.
Saving taxes on energy savings
Last fall’s tax law changes extended a number of energy tax incentives, making it easier for many building businesses to go “green.” In addition to tax credits for utilizing solar or alternative energy in the building business, there is also a unique tax deduction available to anyone making a commercial building more energy efficient.
Tax deductions for energy efficient buildings have been extended through December 31, 2013 and are expected to generate tax savings in excess of $890 million over a ten-year period. Rather than a deduction for the cost of equipment or improvements to make a commercial building more energy efficient, deductible amount is based on the size of the building, up to $1.80 per square foot of building floor area for buildings achieving a 50-percent energy savings target. A lesser flat-rate deduction is available for achieving smaller energy savings.
Planning the obvious
Obviously, not all of the tax breaks that were a part of the 2008 law changes affect all building businesses — nor their owners. In fact, many of the provisions contained in our tax laws, both new and existing, might be better ignored.
A builder might, for example, have acquired necessary equipment in 2008. The expenditure for that equipment would qualify as a Section 179 expensing deduction, small enough not to trigger the ceiling. However, with little in the way of profits, a depreciation write-off over a number of years when profits will, hopefully, be greater and the tax bracket more onerous might be more advantageous.
Planning in the face of change
Of more immediate interest may be the basic tax deductions that warrant attention prior to the building operation’s — and the owner’s — tax filing deadlines.
The Office: If you or some of your staff members regularly work from home, you may be entitled to a tax deduction for expenses related to operating that home office. In fact, this deduction may be available to you as an individual even if you have an outside-the-home office and do the bulk of your work at home.
The home office or shop deduction is available to employees, building businesses, business owners, and self-employed contractors, and offers many opportunities for tax deductions. Virtually all outside expenses are deductible, including rent, utilities, insurance, repairs, improvements, maintenance and the like.
Business Smarts: Uncle Sam wants you to get better at what you do, as well as enjoy the fruit of your labor — after taxes. For example, you can deduct expenditures to maintain or improve existing skills, so long as they are related to the building operation. The cost of education that qualifies you for a new job or profession is not deductible, of course.
Business Benefits: As business owners, builders and contractors have an advantage that most other businesses do not have with regard to health care costs — they can deduct many of their health insurance costs from their taxes.
When it comes to saving for retirement, contractors, builders and other small business owners are better off than their employees. This is because the government allows small businesses to set up retirement accounts specifically designed for small business owners. Obviously, these retirement accounts cannot ignore any employees the operation may have, but they can and do provide enormous tax benefits intended to maximize the amount of money that can be put away in tax-deferred accounts during working years.
Fun and entertainment: There are also those enjoyable, entertaining tax deductions. Frequently, important business meetings, client contacts and marketing efforts take place at restaurants, golf courses or sporting events. Under our tax rules, you can deduct amounts spent for entertainment and half of the amounts spent for food and beverage.
Remember, however, because taxpayers continue to abuse this deduction, the IRS has strict rules limiting the types and amounts of entertainment costs that are tax deductible — and they enforce them, providing another good reason to seek professional tax advice.
In the area of fringe benefits, retirement plans and the like, the majority of shareholder/owners, partners and principals are considered employees of the business, entitled to reap all rewards offered by the business. Naturally, those benefit programs cannot discriminate in favor of the owner/shareholder or any highly-compensated worker.
It should be obvious by now that professional advice is a virtual necessity for every building business as well as every builder and contractor. It is not too late to take full advantage of the new and, in many cases, temporary, tax breaks that became a reality during 2008. Nor is it too late to develop a strategy that will help reduce the tax bill for the 2008 tax year — and for many years to come.
Mark Battersby has 30-plus years experience with small business issues as a tax and financial consultant, lecturer and writer. Contact him at 610-789-2480 or MEBatt12@Earthlink.net