New tax incentives aimed at helping out people like metal fabricators
January 29, 2004
Most fabricators aren't knowledgeable about tax laws and don't have time to immerse themselves in tax updates. They're too busy on the shop floor.
That's why The FABRICATOR®sought out a tax expert to explain the opportunities presented by the Jobs and Growth Tax Relief Reconciliation Act of 2003, signed into law by the president this summer. Mark Sellner is the managing principal of tax services for Larson Allen, Weishair, and Co., a Minneapolis-based accounting and financial services firm.
Can you provide some background related to the Jobs and Growth Tax Relief Reconciliation Act of 2003?
Mark Sellner: The Bush legacy will be one of tax cuts. In 2001 [the Economic Growth and Tax Relief Reconciliation Act] was primarily geared at individual investing and savings. In 2002 [the Job Creation and Worker Assistance Act] was a reaction to Sept. 11 to try to stimulate business spending. In 2003 it is really about pulling pieces from 2001 and 2002 in the form of either accelerated tax cuts or enhanced write-offs.
Right now, we have a 35 percent top tax rate. That was already scheduled in 2001. It was just going to be a couple of more years before that kicked in. And that's a big piece of the 2003 law that just moved forward. Also, the 50 percent bonus depreciation was already in place last year, but at a 30 percent rate.
So in 2001 it was about individual rates. In 2002 it was about business incentives. In 2003 it was about enhancing both of those laws to try to jumpstart the economy.
Are these tax incentives strictly dedicated to investment in machinery?
Sellner:This is going to be for business-use equipment and lease-hold improvements, which is a big deal if people are leasing facilities. If they had to do any build-outs in the past, they normally had to write off the costs over a 39-year life. That's a long time for a fabricator to recover some lease-hold improvements.
What this allows them to do is get an accelerated write-off on that type of stuff. Until now, the tax life has been way out of whack with the economic life. You are probably going to remodel or abandon before 39 years has passed.
What are the new arrangements associated with the new tax incentives?
Sellner:If you have lease-hold improvements, you are now able to use the bonus depreciation—the 50 percent write-off—right upfront.
So [Congress has] included what would have been part of a 39-year write-off of a building and lumped that in with other business equipment.
Can this be applied to used equipment?
Larson, Allen, Welshair, and Co.
Sellner:What Congress is trying to do is get new equipment out in the field. If you get something new, that means somebody had to build something.
You have to remember that these business provisions—the expensing and the bonus depreciation—that we are looking at all came out after Sept. 11, 2001. The whole idea was how to get new equipment out in the field.
Is this a tool that small fabricating shops will take advantage of?
Sellner:Yes. For example, if you are going to do any kind of investment, you'll take a look at this. The investment might even include vehicles. People are starting to talk about vehicles more than 6,000 pounds, which are going to have up to $100,000 of expensing [allowed]. We are seeing the auto dealers using that as a sales tool, saying you can write off the whole vehicle for business use.
So we are talking about $100,000 expensing, which used to be a Section 179 expense that had been at a $24,000 level. That's a real small business provision. At one time if you had more than $200,000 of additions, you couldn't use that expense; you had to use regular depreciation. So the new law says we are taking the $24,000 up to $100,000 in write-offs, and you don't lose it until you have more than $400,000 of investment.
My old company has a plant in Joliet, Ill. It is so big that it is not going to get that write-off for $100,000, but the fabricators will.
Republicans are trying to get money in people's hands and move the economy. This is all geared toward the November 2004 elections.
Let's paint a clearer picture. How might a fabricator interested in a $250,000 piece of equipment be able to take advantage of the new tax laws?
Sellner:Normally the company would probably write that off over seven years. But under the new law, it is going to be able to expense up to $100,000 of it and then take 50 percent write-off of the remainder.
If you have $250,000 in your equipment, you can write off the first $100,000. So you have $150,000 left, and then you can expense 50 percent of that in bonus depreciation. That writes off $75,000. Now you have written off $100,000 under expensing and another $75,000 under bonus depreciation. And the remaining $75,000 you can depreciate over a seven-year life. So it really has accelerated tax deductions.
I call it triple-dipping. You can expense part of it, accelerate the bonus depreciation on part of it, and still depreciate the rest, all in one year.
Do you see this jump-starting investment?
Sellner:We are definitely seeing people making investment decisions based on the depreciation. The only real problem with it is that a tax write-off is only good when you have income to offset. So people that are struggling with margins with their customers and can't pass along price increases likely won't be interested in this. You still have to have income to offset with your deductions.
From a historical standpoint, have these types of tax incentives worked to get the economy moving?
Sellner:In the past, Congress has sometimes used the investment tax credit as an offset against tax. Where that credit would reduce tax, this [new tax law] reduces taxable income. This concept of giving additional tax breaks for additional investment isn't new.
Some of your readers will remember the old investment tax credit. And this has really been replaced by additional tax additions or business write-offs.
Larson, Allen, Weishair, and Co., 220 S. Sixth St., Suite 300, Minneapolis, MN 55402-1436, 612-376-4580, 612-376-4850, www.larsonallen.com.