Member Columns

By Barry Leasure, partner with Greer & Walker, LLP, (704) 377.0239 or bleasure@gwllp.com  or visit www.greerwalker.com   

2008 ECONOMIC STIMULUS ACT - GREAT FOR CONSTRUCTION FIRMS, BUT WATCH FOR PITFALLS

To help jump-start the economy, Congress recently passed the Economic Stimulus Act of 2008. It's designed to inject $152 billion into the U.S. economy.  More than 100 million Americans will and have received rebate checks this year, along with child payments for qualifying children.  Businesses can take advantage of two other tax breaks mentioned in this Act: enhanced Code Section 179 expensing and bonus depreciation.  Since most of you already know about the personal rebate checks, let’s focus on the two business tax breaks.

Although not as extensive as originally proposed, the business incentives have real value to the construction industry.  The new law nearly doubles the amount of deductible Code Section 179 expensing for 2008 and also provides for bonus depreciation. Both provisions offer great opportunities for contractors; however, you must plan carefully or you may be surprised with some tax consequences.

Code Section 179 Expensing.  Before the new law, businesses could expense up to $128,000 of the cost of qualifying property in 2008.  If the cost of qualified property placed in service during the year is more than $510,000, the ceiling for that business is reduced by the amount over the applicable limit.  Under the new law, a business can expense up to $250,000 of the cost of qualifying property and the old $510,000 ceiling jumps to $800,000.

The new law makes no changes to the general rules for the types of property that are eligible for expensing.  Generally, the property must be tangible personal property, which is actively used in the taxpayer's business and for which a depreciation deduction would be allowed.  The property must be used more than 50 percent for business and must be newly purchased property.  The existing exception for computer software applies to the enhanced expensing amounts under the new law. For medium to small contractors this gives an opportunity to invest in equipment and have the ability to deduct all the investment in the first year.

The downside is that this deal is for one year only. The law states that the enhanced deduction only applies to tax years beginning in 2008. If your company is a calendar taxpayer, your tax year starts January 1, 2008, so all qualified purchases during 2008 could be eligible for the deduction. For fiscal year taxpayers, qualified purchases after the start of the year in 2008 and up to the end of the year in 2009 could be eligible for the enhanced deduction. For example, a company whose fiscal year starts on April 1, 2008, cannot utilize the enhanced deduction on property placed in service in March of 2008, but can take the additional deduction on eligible property placed in service in March of 2009.

Fiscal year flow-through entities, such as S Corporations, LLCs, and Partnerships need to be extra careful. The activity from a fiscal year S Corporation, LLC, or Partnership that begins in 2008 will flow through on a K-1 form to the individual shareholder/member’s 2009 calendar tax return. So, even though the company can deduct up to $250,000 in property, the individual shareholder/member will be limited to the $125,000 deduction. This is still ok if the company has many owners and none own more than 50 percent of the company. If there is a majority shareholder the deduction will be limited and the excess will be lost, thus careful planning is a must for fiscal year companies.

Bonus Depreciation.  The other incentive is bonus depreciation.  The new law provides qualifying taxpayers 50 percent first year bonus depreciation of the adjusted basis of qualifying property.  This provision is substantial, providing American businesses with an estimated $44 billion in additional deductions in 2008. There is no dollar limitation on the amount of eligible property placed in service so this provision will especially benefit the larger construction firms.

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 (this could include land improvements, paving, signage, carpeting, etc.); (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. The property generally must be contracted, purchased, and placed in service all during 2008 which could be a very small window of time for large machinery purchases such as concrete and asphalt plant equipment.

Even though the federal government is generous with the bonus depreciation, the states, most likely, will not. North Carolina’s position on bonus depreciation is not finalized; however, it is proposing to add back 85 percent of the bonus deduction to income in the first year and spread out the deduction over the next five years. This add back could be quite significant with the larger contractors; therefore careful consideration must be given or the taxpayer could be significantly underpaid to North Carolina. South Carolina also does not comply with the federal deduction and will add back 100 percent of the deduction and does not deduct in later years.

As you can see, there are plenty of opportunities for companies to benefit from this new rule, but you definitely should consult with your tax professional to help plan purchases in order to optimize the benefits of the new ruling.