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 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.
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.