Tax Law Benefits Contractors
The Economic Stimulus Act of 2008 (ESA) contains
several provisions that are beneficial for contractors. In particular, ESA
helps contractors that are planning to purchase equipment by raising the
Section 179 expensing and investment limits. In addition, ESA provides for a
bonus first-year allowance that will help contractors depreciate more of the
cost of a business asset in the year it is placed in service.
Increase in Section 179 Expensing
A contractor that buys machinery, equipment, trucks and other qualifying
assets can elect under Section 179 of the tax code to expense (deduct
immediately, rather than depreciate over several years) the cost of the
property purchased and placed in service during the tax year, up to a
specified dollar limit. The maximum expensing amount is phased out,
dollar-for-dollar, once the cost of the qualifying property placed in
service during the tax year exceeds a specified amount. Moreover, the amount
that can be expensed can’t be greater than the taxpayer’s taxable trade or
business income.
ESA increases the limits applicable to the Section 179 expensing election
for the 2008 tax year only. For property placed in service in tax years
beginning in 2008, ESA raises the $128,000 expensing limit to $250,000. The
overall investment limit jumps from $510,000 to $800,000. As a result of
these increases, many small and medium-sized contractors may be able to
claim a deduction for the full cost of the equipment and machinery they
place in service this year.
Example: M Paving Company, with 2008 taxable income of $300,000 (not
considering the expensing deduction), buys and places in service during the
year new equipment costing $220,000. Under the Economic Stimulus Act of
2008, the full $220,000 purchase price of the equipment can be deducted for
2008 tax purposes.
Bonus First-year Depreciation
The new law also provides another incentive for the purchase of
business-related assets. Taxpayers can claim an additional first-year
depreciation deduction equal to 50% of the adjusted basis of qualifying
property (generally, new business property rather than real estate). The
adjusted basis of the property is then reduced by the bonus depreciation
when computing regular depreciation on the property. This additional
deduction is generally available for property acquired after December 31,
2007, and before January 1, 2009.
Example: LJM Construction Corporation, a calendar-year taxpayer, bought $1
million of machinery with a five-year life under the tax law’s depreciation
rules. Under the prior law, the first-year depreciation on the machinery
would have been $200,000 (20%). Thanks to ESA, LJM Construction can deduct
first-year depreciation of $600,000 (i.e., 50% of $1 million bonus
depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis
($100,000)).
The latest changes in the tax law may present opportunities for your firm.
Please
contact us to discuss your company’s situation.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
