Construction Companies Should Think Strategically About New Tax Incentives
Provisions in the recently enacted
Small Business Jobs Act of 2010 could be advantageous in your business and tax planning. First, the Section 179 deduction amount increases to $500,000 and adjusts the asset addition phase-out threshold to $2 million. In addition, bonus depreciation, allowing companies to depreciate 50 percent of the cost of equipment in the first year (subject to certain limitations), was extended for 2010.
Section 179 deduction
Section 179 allows a company to deduct certain property and equipment in the year of acquisition. Prior to this legislation, the first-year Section 179 expense deduction allowed businesses to write off the first $250,000 of capital equipment purchases, and was phased out on a dollar-for-dollar basis as eligible purchases exceeded $800,000. The expanded deduction of $500,000 with a $2 million phase-out threshold applies for tax years beginning in 2010 and 2011, and will result in a greater number of qualifying businesses.
Retroactive extension of bonus depreciation
During 2008 and 2009, the tax law allowed a 50 percent first-year bonus depreciation for the cost of new property. The new legislation retroactively extends this to property that is both acquired and placed in service during calendar year 2010.
The definition of qualified property for the 50 percent bonus deduction has been slightly expanded. It must have a recovery period of 20 years or less; the original use must commence with the taxpayer (i.e., the property is new rather than used); and the asset is both acquired and placed in service within the eligible time period. Certain real property additions are now included.
Consider your business strategy
“Although these provisions appear to provide a significant incentive for companies to ramp up their capital expenditures for this year, proceed with caution,” says David English, construction manager with LarsonAllen. “Reducing your working capital and taking on new debt should always be based on a business decision, and not for the potential impact on your tax liability.”
With backlogs down and net income at or below break even for many construction companies, purchasing new equipment to generate a possible deduction may not be advisable. On the other hand, if your company has backlog, and it appears that demand for your service will continue, the right price for a new machine at the right time may be an opportunity to update your fleet and utilize the benefit of a quicker write-off, according to English.
Bonus depreciation will reduce 2010 taxes by only a percentage (depending on many factors including the company’s effective tax rate) of every dollar spent on equipment purchases in the current year. “An equipment purchase will have a greater impact on profitability and sustainability than on your tax liability,” English advises.
Additional incentives and deductions may apply
The Small Business Jobs Act includes many provisions, and some others may have significant implications for you and your company. For example, businesses with long-term construction contracts generally use the percentage-of-completion accounting method. Under the new law, they will be able to deduct any 50 percent bonus depreciation on equipment with a seven-year or less recovery period, but they can ignore that write-off in calculating the costs for the percentage-of-completion of ratio.
Provisions that may be of interest:
How we can help
Are you wondering if these proposed changes will affect your tax planning for the year? We can review your tax situation and operations to help determine if such investments (and related deductions) could benefit your company.
David English, Construction Manager
denglish@larsonallen.com or 847-236-9800
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