Mark E. Battersby • Tax Consultant
The recently passed Economic Stimulus Package of 2008 is a $168-billion economic “rescue” package that includes rebates for taxpayers and tax breaks for businesses. Tax rebates, the heart of the package, are scheduled to be distributed beginning in early May. The tax breaks for businesses such as forging and diecasting operations, are retroactive to the beginning of 2008.
The business portion of the economic stimulus package doubles the amount of equipment expenditures a small business can expense or immediately write-off on their 2008 tax return from $125,000 to $250,000, with the investment limit increased from $400,000 to $800,000. Naturally, as with many of the options in our tax laws, every foundry owner will have to decide for him- or herself if the new limits will aid in stimulating the economy of their metalcasting business/operation.
Generally, the cost of equipment used in foundries and diecasting operations is recovered via annual depreciation deductions spread over the useful life of that equipment. In lieu of depreciation deductions spread over a number of years, the tax rules allow foundries with sufficiently small amounts of annual investment the option of deducting (or expensing) equipment and property under Section 179 of the tax law.
In addition to the increased, first-year write-off for newly acquired business assets, another business provision contained in the new economic stimulus package, a 50-percent “bonus” depreciation deduction is allowed for qualifying, new depreciable property that is placed in service during 2008. The deduction can be claimed for the cost of property after reduction by any Code Section 179 allowance claimed.
After the cost of that new, depreciable property has been reduced by the Section 179 expensing allowance and the bonus depreciation, the amount remaining is depreciated or written-off over the property’s useful life.
Generally, the so-called “major equipment purchases” encouraged by lawmakers do not include buildings. However, structures built as part of equipment or specifically to house equipment, may have a useful life of less than 20-years and qualify for bonus depreciation.
Similarly, the courts have recently begun allowing businesses to depreciate “components” of buildings as an asset separate from the building, usually over a shorter period than the underlying building. Thanks to so-called cost segregation studies, even existing buildings have been broken into segments, allowing faster write-offs for building components that are not essential to the operation of the underlying building. For example, a ventilation system that is usually tied into the use of the equipment rather than the operation or maintenance of a building can qualify as equipment rather than required to be written-off over the life of the building.
So-called “personal property” used in a building, such as furniture or components or parts identified as a result of a cost-segregation study qualify for the 50-percent allowance if placed in service not later than 90 days after the building is placed in service. Buildings, as mentioned, usually have useful lives longer than the 20-year ceilings and do not qualify for bonus depreciation.
The “luxury” label used to designate many automobiles used by foundry and diecasting businesses – and their owners – is woefully out of date. For example, for 2007 a vehicle was subject to the limitation if its value was at least $15,100 for passenger automobiles and $16,100 for trucks or vans.
Ordinarily, under the luxury auto rules, the first-year limit on depreciation for passenger automobiles cannot exceed $3,060. However, this limit was increased when bonus depreciation was previously available to $4,600.
The new law raises the cap, once again, this time to $8,000, if bonus depreciation is claimed. For a qualifying vehicle, a maximum first-year depreciation writeoff of no more than $11,060-$11,260 is permitted for vans or trucks. If the vehicle is not predominantly, used for business in a subsequent year, then bonus depreciation must be recaptured.
Obviously, it is not easy trying to break a life-long habit of minimizing income and maximizing deductions in order to produce a low tax bill. It is even more difficult when lawmakers tout increased deductions as a cure-all for our economy. Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored altogether.
A good example is provided by a start-up operation. A new business, venture, or enterprise, rarely generates a great deal of income. With little or no income, even regular tax deductions may be wasted.
As many metalcasting owners and operators are aware, the write-off period for newly acquired capital assets differs greatly between the period when the building, fixtures or equipment will contribute to the operation’s profits and what our lawmakers label an asset’s “useful” life.
In addition to a shorter “useful life,” or write-off period, the tax rules encourage investment in business assets by allowing accelerated depreciation. In other words, even under the basic method of depreciation, write-offs are accelerated, greater in the earlier years when out-of-pocket expenses are greater with smaller deductions in later years.
However, neither accelerated depreciation nor the first-year write-off is mandatory. Although, depreciation deductions may not have been claimed on the tax return, they do “accrue” and figure in the computation for gain or loss when property is eventually sold, abandoned or otherwise disposed.
The Economic Stimulus Package of 2008 is a reality and there is more to it than mere rebates. The limited tax breaks for metalcasting businesses include a 50% bonus depreciation deduction for new equipment, saving businesses an estimated $42.3 million in 2008. Businesses also will be permitted to fully expense (immediately deduct) up to $250,000 of both new and used business property, saving them almost $1 billion.
A number of questions are left unanswered by our lawmakers, including: how can a troubled foundry afford new equipment or property acquisitions; where will an owner or operator find financing for additional equipment; and, most importantly, will those new write-off limits and bonus depreciation really stimulate the economy of your metalcasting operation?