Bonus Depreciation Expires in DecemberWritten By Pam Gruebnau
Article Date: 08-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.
Don't be caught in the end-of-the-bonus depreciation nightmare.
It seems like just yesterday. In 2001, AED lobbied Washington to pass President Bush’s Economic Stimulus package. Then AED printed bonus depreciation brochures you could hand out to your customers to explain it. In 2003, we lobbied to have the bonus depreciation provision increased from 30 percent to 50 percent and to have the expiration date extended to December 31, 2004. That date is fast approaching, and it looks like the party is over. So what should you expect?
The two things most experts are expecting as a result of the expiration of bonus depreciation are 1) strong fourth quarter sales and 2) large taxable gains potentially being recognized throughout the economy beginning in 2005. While strong sales are welcome, the inflated gains could be a big problem, and specifically so for equipment dealers with capitalized rental fleets.
Don’t run for cover yet. There may be a way to preserve – and even increase – your bonus depreciation benefit.
But first let’s talk about increased sales. At AED’s Annual Meeting in Orlando, a common theme was heard throughout: “Record sales in the fourth quarter of 2003 and specifically, in December.” Contractors were being confronted with the choice to buy capital equipment and take the 50 percent bonus depreciation (plus 1st year standard MACRS depreciation), or write a check to Uncle Sam from record profits. Many of them ended up at one of your dealerships with a smile and a check.
This year, we expect a similar and maybe larger year-end rush. The same scenario is in place, but this year, there are a couple of potentially magnifying factors. One is that revenues and profits are up across the board, so most companies will have even more income to shelter. And two, bonus depreciation is going away, and we very well may get one last hurrah.
That’s what we are all hoping for, a busy holiday. On the other side of the New Year, it’s back to reality. Companies will be selling assets with an artificially reduced tax basis, and thereby recognizing inflated tax gains and paying inflated tax bills.
This is of particular concern to those of you who have rental fleets on which you’ve been taking bonus depreciation. Your customers who have “bonus” equipment that needs to be replaced can simply bring it in on trade and do a simultaneous like-kind exchange. That means they give you the old machine, take their new one and roll the gain into it. No cash has changed hands so it is simple to do.
The problem for equipment dealers is that there is generally no place to trade your capitalized “bonus” machines. When you dispose of machines, it’s normal to sell them for cash. So, what can you do? You can do a deferred like-kind exchange for all of your capitalized assets, but it requires some outside help.
On August 2, AED entered into an agreement with Accruit LLC, an AED member for two years and a like-kind exchange solution provider, to provide like-kind exchange programs to AED members at a significant discount.
You can talk to Accruit or another like-kind exchange vendor, but the point is, if this is a problem for you, get help fast. Don’t be caught in the bonus depreciation nightmare. A like-kind exchange program will not only preserve your bonus depreciation benefit, it can increase it and extend it, as long as you stay in the program and tax laws remain relatively unchanged.
Excerpted from August 2004 Construction Equipment Distribution.
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