Will the Tax Stimulus Package benefit you?

I just returned from ConExpo-Con/Agg, and I?m dead tired. My shoes need replacing; I?m not sure, but my feet might need replacing. That was one heck of a show.

From what I could see and from talking to various manufacturers, it looks like people were placing orders to take advantage of the meager interest rates and the soft market conditions.

I polled various contractors in the Midwest over the past few months and most said they had work for 2008. When talking to those same people in Vegas, they still had work but some of the bigger projects related to retail outlets were getting pushed back 12 to 18 months. Just goes to show you how fast things change.

One thing that surprised me, however, was the response I received from dealers when I asked how much the contractors were asking about the new tax stimulus package and how they might take advantage of the program. Almost everyone I spoke with said equipment owners were not really aware of the program nor understood it. Consequently, we are going to go through the package, take a look at a few numbers and refer you to a website that can calculate the perceived benefit for you. Keep in mind, I am not providing tax advice.You have to get that from the professional you pay to provide that service.

There are two parts to the Tax Stimulus Package that relates to the purchase or ownership of construction equipment:

  • Section 179 - Expensing of Certain Depreciable Assets
  • Special Bonus Depreciation Rules

We are going to cover both topics and lead you in the right direction to determine if there is a benefit in store for your company or you provided by these changes in the tax code.

Section 179

Section 179 allows a taxpayer to deduct or expense the cost of qualifying property placed in service during a taxable year. If you qualify you might get to write off 100 percent of the investment. To qualify, the equipment has to be defined as depreciable tangible personal property (no real estate).

The new law allows a taxpayer to expense up to $250,000 of qualifying assets placed in service in 2008, as long as the taxpayer does not purchase qualified personal property in excess of $800,000 during that same tax year. If purchases exceed $800,000 the Section 179 benefit is reduced on a $1 for $1 basis for all amounts over $800,000. In short, once you hit $1,050,000 in 2008 property purchases you get zero Section 179 benefits.

Important points to remember:

  • Section 179 applies to years beginning in 2008. If you are on a calendar year, it?s Jan. 1 through Dec. 31, 2008. If you are on a fiscal year the benefit is available at the start of your 2008 year, whenever that is.
  • Section 179 applies to both new and used equipment purchases.
  • Section 179 deductions cannot be used to create or increase an operating loss. You can carry them over to another year but still are restricted from generating or increasing a tax loss.

Bonus depreciation

The bonus depreciation rules allow a taxpayer to depreciate 50 percent of qualified tangible personal property as long as the purchase was consummated and placed in service in 2008. Contracts completed in 2007 and delivered in 2008 do not qualify.

In addition, taxpayers are allowed to apply normal MACRS depreciation to the 50 percent of tax basis remaining. For the first year MACRS allows a 20-percent deduction, and in this case you would get the 50 percent and then 20 percent of the remaining 50 percent or another 10 percent of the original cost, for a total of 60 percent of the original cost as a deduction in 2008.

Taxpayers can generate a tax loss from the depreciation deductions to carry back to recover taxes paid in prior years.

Important points to remember:

  • The bonus only applies to new equipment.
  • On rent-to-sell transactions only the original lessee can use the bonus and only if they convert the rental to a purchase within the first three months of the transaction.
  • The bonus depreciation is allowed for both regular and alternative minimum tax. No AMT penalty for taking the bonus.

So if you purchase qualified equipment worth $500,000 you would get the following benefit:

Cost $500,000

Section 179 deduction $250,000

Bonus Depreciation $125,000

MACRS Depreciation $ 25,000

Total tax deductions $400,000

Tax Benefit @ 35% $140,000

Now I assume you want the bad news ... and there is some. If you write off $400,000 of a machine costing $500,000 in 2008, you only have $100,000 to write off in the future. If you follow a ?Bird in Hand? philosophy then you might want to take the bucks while you can. In any event, any time you use this type of benefit you have to stay on top of your tax planning in the future.

For example, should you sell a piece out of your fleet that has zero tax basis, the gain is 100 percent taxable at ordinary rates. If you normally had depreciation deductions to offset these gains, you didn?t have to worry about it. But if you used the Section 179 and bonus, you might not have the tax deductions you need to cover the gain. You could, of course, use a 1031 tax-free exchange to defer the gain, but that is a story for another day.

So, do you use the benefits or not? To make that determination you need to know the following:

  • How much equipment you plan on buying in 2008.
  • How much tax you paid in the past two years and at what bracket.
  • What your expected tax profits are for 2008.
  • You also have to keep in mind the enticing interest rates available for equipment purchases.

If you have a need for equipment and can take advantage of the tax benefits, it is worth investigating. If not, you don?t have to use these temporary rules. The interest rates alone might interest you enough to make a purchase.

You can go to www.depreciationbonus.org for AED?s Stimulus Package Benefit Calculator. Fill in the cost of the equipment being purchased and what you have available for Section 179 and it will do the rest.

For those of you that have the need, the Stimulus Package provides benefits. For those of you who don?t know if you have the need, now is the time to find out.

Garry Bartecki is director of dealer/distributor services at BDO Seidman LLP of Chicago, as well as consultant to Associated Equipment Distributors (AED). He has also worked as an independent CPA and consultant to equipment dealers. He can be reached by phone at (312) 616-4677 or email at gbartecki@bdo.com.