Replacing worn or outdated equipment is a fact of life for contractors. It may seem as though the list of what you have to buy to remain competitive only gets longer every year — and the items more expensive.
Accelerated depreciation can help reduce the near-term sting of making these important equipment investments. Typically, business owners in the United States may gradually depreciate, or write off, the cost of purchasing equipment on their taxes. Depreciation is recouped over the life of the equipment, which means it can take years for the full savings to be realized.
Getting a bonus
In an effort to spur economic growth through capital investments, lawmakers earlier this year extended a temporary bonus depreciation period that allows business owners to write off 50% of the entire price tag for buying “qualified property” between Jan. 1 and Dec. 31, 2013. Congress placed no monetary limit on the amount of equipment businesses may purchase, but the equipment must be new and operational by the end of 2013.
Spending, then expensing
In addition to extending the 50% depreciation provision, Congress also extended and expanded Sec. 179 expensing. This tax break can be particularly helpful to small and midsize construction companies.
Sec. 179 expensing allows business owners to deduct on their tax returns 100% of the costs, up to $500,000, associated with buying a wide variety of new and used equipment. Items covered include equipment for transportation, telecommunications, storage facilities and computer software. There are also specific provisions designed to help certain real property owners lower their tax burdens through various eligible improvements. (Note: The Sec. 179 deduction is allowed only to the extent of an entity’s taxable income.)
After Jan. 1, 2014, the maximum amount business owners can expense under Sec. 179 is scheduled to drop to just $25,000. In the meantime, you can still enjoy the impact of the higher Sec. 179 expensing amount on your cash flow.
For instance, say an electrical contractor buys $600,000 worth of equipment before year end. She can then expense $500,000 of those purchases on her company’s 2013 tax return.
Taking them together
But there’s more. Taken together, the 50% depreciation and Sec. 179 expensing provisions in effect until the end of the year can create even bigger tax savings for your construction company.
Let’s go back to the electrical contractor in the preceding section. While $500,000 of her $600,000 in service truck purchases qualifies for Sec. 179 expensing, the remaining $100,000 in outlays qualifies for 50% bonus depreciation. And she can write off the remaining $50,000 on the standard five-year depreciation for service trucks, which provides a $10,000 deduction this year. Thus, at the end of the day, she bought $600,000 worth of service trucks and is able to write off $560,000 of the total amount on her 2013 tax return.
Whether used separately or together, 50% bonus depreciation and Sec. 179 expensing can generate substantial tax savings. But, as mentioned, these breaks are scheduled to expire in their current forms on Dec. 31.
Check with your tax advisor about whether you could put either or both to work for your construction company. Also ask about your state’s treatment of 50% bonus depreciation and Sec. 179 expensing — some states have decoupled from federal provisions like the state of Ohio.
Please contact Tony Schweier at [email protected] with any questions on this topic.