New Law Creates a Huge Incentive for '08 Equipment PurchasesBy Joanne Costin
Article Date: 04-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Will the ESA's impact be good or great? Either way, it should be a winning proposition for dealers.
Everyone agrees that the Economic Stimulus Act (ESA) is a good thing. But will it lead to the great market conditions that occurred after similar legislation was passed in 2002? In addition to providing tax rebate checks to lower and middle-income families, the law provides a huge incentive for businesses to invest in 2008. By temporarily increasing Sec. 179 expensing limits and reinstating the depreciation bonus, the law reduces the tax liability of businesses that invest in a broad range of tangible personal property (not real estate). "It's a way to encourage business people who need to buy new equipment but who might be thinking, ‘Well the economy is a little uncertain, so maybe I won't,'" said Ron Riecks, general manager of Wells Fargo Construction, a leading finance provider for the industry. Details of the Law
For tax years beginning in 2008, the Section 179 provision nearly doubles the expensing allowance to $250,000 from $128,000. And as long as companies purchase new or used equipment at a cost of less than $800,000 (up from $510,000) they can expense up to $250,000. For purchases in excess of $800,000 the expense deduction is reduced dollar for dollar, so at $1,050,000 there is no longer any benefit. However, companies that exceed $800,000 in capital expenses can still qualify for bonus depreciation on new machine purchases. For 2008 asset additions, a temporary reinstatement of bonus depreciation provides an additional incentive. Without the ESA, companies would normally depreciate a percentage of the purchase price of the equipment based on its useful life. For example, under the Modified Accelerated Cost Recovery System (MACRS) required by the U.S. Income Tax code, a $100,000 machine that had a useful life of five years would be depreciated $20,000 in the first year. With ESA, 100 percent of the machine cost could be depreciated in 2008 if total expenditures were less than $800,000. And if total expenditures were more than $800,000, $60,000 could be depreciated utilizing the bonus depreciation - $50,000 plus another $10,000 (20 percent of $50,000). Unlike Section 179, only new equipment purchases qualify for the bonus.
A key stipulation of the law is that the original use of the equipment and the purchase must take place before Jan. 1, 2009. For this reason, Riecks advises contractors to meet with their accountant at the beginning of the year to plan how the bonus depreciation will be applied to expected purchases. AED Gets the Word Out
"To the extent that dealer salespeople are knowledgeable about the ESA, I think it would help them drive sales," said Riecks. To ensure maximum impact from the legislation, AED has instituted several initiatives to get the word out to both dealers and contractors. It has launched www.depreciationbonus.org, a Web site clearinghouse for information about the capital investment incentives that are part of the ESA. Here, both contractors and dealers can find a wealth of resources such as a summary of the law, links to the legislation, a study on the effects of the 2002 depreciation bonus, and a calculator to determine depreciation expense and estimated tax savings. "Depreciationbonus.org is a great resource," said Riecks, who has been directing contractors to the site. Other tools include a brochure developed by AED and the Association of Equipment Manufacturers (AEM) to answer questions about the Economic Stimulus Act. AED members will receive 25 complimentary copies of the brochure, which can be also be downloaded from www.depreciationbonus.org. A recent teleconference on the depreciation bonus and Section 179 was attended by 140 AED members. Highlights of the call, featuring industry tax expert Steve Pierson, of the Oak Brook, Ill.-based accounting firm, Selden Fox, AED vice president of Government Affairs, Christian Klein and AED vice president of Finance & Administration, Garry Bartecki are available at www.depreciationbonus.org. "We are playing a leading role in promoting this, as we did when similar legislation was passed in 2002," said Klein.
Companies such as Wells Fargo Construction are also willing to educate dealer sales teams about bonus depreciation and the expense deduction so that they understand the incentive. Interested dealers should contact their local Wells Fargo representative or Greg Giauque, marketing manager at (480)784-2363.Running the Numbers
The key number for contractors and their accountants to determine is the level of pre-depreciation income. Depreciation expense reduces taxable income. However, according to Pierson, "It's also important that you don't put all your weight on income this year, because net operating loss in 2008 can be carried back to 2006 and 2007, or carried forward to 2009 and beyond." "What it means is you have to run the numbers," says Pierson. "Proper planning is essential to maximizing the use of the tax incentives." For example, say that XYZ Construction plans to make a net profit in 2008 and equipment purchases total $500,000. Prior to the ESA, the purchase would be depreciated over five years, with a first-year depreciation expense of 20 percent or $100,000. Assuming a 40-percent tax rate, the tax savings would be $40,000. This year, utilizing both Section 179 and bonus depreciation, plus 20 percent of the $125,000 remaining basis, total depreciation expense is $400,000 and the tax savings increase to $160,000. The business has an additional $120,000 in cash.On the downside, the more companies depreciate their assets in 2008, the less there will be to depreciate in future years. That may mean higher taxes down the road. Therefore, use of the depreciation bonus is optional. However, given the time value of money, there is a financial advantage to having the cash invested in your business, as opposed to having it work for Uncle Sam. Leasing and the ESA
"Anybody who has work to do and needs equipment, but expects a loss this year, would clearly be a candidate to lease equipment," said Riecks. Under this scenario, tax benefits would be passed on to the leasing company and would result in a lower lease rate. If a company purchased a machine in 2008, but later determined it would not be able to benefit from the depreciation bonus, it has 90 days to transfer that depreciation bonus back to a leasing company. Similarly, if a company leases new equipment in 2008, but then decides to purchase, it has 90 days to purchase and claim the depreciation bonus. Again, careful planning will help companies use the law to their best advantage. "The best thing we can do is to let customers know what is available to them," said Paul Campbell, AED's 2008 chairman and executive vice president of Wheeler Machinery Co., based in Salt Lake City, Utah. "Our role is to educate and inform and then let customers make their own decision based on their own situation and their own tax professional's advice." Dealers too, just like any other business, need to evaluate how the new law might help them upgrade their own rental fleets or invest in other capital equipment. Déjà vu? Can ESA Generate the Buying Activity of 2003?
When it comes to the impact of the Economic Stimulus Act on equipment purchases, dealers are hoping history repeats itself. By all accounts, similar legislation enacted in 2002 delivered very positive results for the industry. However, today's market conditions are different than they were in 2002. Then, overall business investment had declined over the prior year. "I think there was a general pent-up demand, just because economically we had gone through a pretty slow period," said Campbell. Today, while the housing market is down, commercial, industrial and infrastructure markets remain strong, so demand may not be as great as it was six years ago. Riecks believes the contractor's work picture will be the key driver of equipment purchases. The fact that the current inventory is younger and more productive may also play a role in determining the impact of the legislation. "There has been an awful lot of new equipment purchased in the past two years," said Campbell. "Right now there is a capacity to do a tremendous amount of work." New equipment transactions based on UCC-1 filings compiled by Equipment Data Associates demonstrate the historic sales trend. Despite differences in the market between 2002 and today, the impact of the legislation is expected to be positive. It may be most helpful to dealers in that it will encourage customers who might have rented to choose to buy instead. In California, where contractors need to upgrade fleets to meet new emissions requirements, the new legislation may accelerate the pace of investment. "If someone was planning to replace a machine in two or three years," said Campbell, "they will bring that purchase forward."Sources agree that dealers who promote the potential benefits of the law stand to gain the most for themselves and their customers. n
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