Tax Planning: Past, Present, and Future Savings

Dec 1, 2008 12:00 PM, By Mark E. Battersby, Freelance Writer

Practical tips to help electrical contractors understand today's tax laws and reap the maximum benefit from every tax dollar

As the deadline for filing tax returns fast approaches, every electrical contractor should be aware of the many changes to our tax laws — changes that will affect the tax bill for 2008 and many years to come. Naturally, not all of the recent tax law changes applied to the electrical construction and maintenance business. For example, last summer's passage of the Housing and Economic Recovery Act of 2008 was notable for the absence of significant business-related tax incentives. The bill's First-Time Homebuyer Tax Credit, the Reduced Home Sale Exclusion, and other consumer-oriented provisions virtually hid the acceleration of large-corporation estimated tax payments.

Stimulating the economy

Earlier in 2008, the Economic Stimulus Act of 2008 was signed into law complete with rebates and business incentives. Most noticeable for the recovery rebates, reaching as high as $600 for individuals and $1,200 for married couples, the new law also included $44.8 billion in business incentives.

For electrical contractors who acquire equipment, the new law almost doubled the Section 179 immediate write-off for newly acquired equipment to $250,000 — but only for 2008. Thus, up to $250,000 of the cost of equipment acquired (and placed in service in 2008) can be treated as a business expense and fully deducted on the tax returns for the 2008 tax year. Should newly acquired equipment costs total more than $800,000 for 2008, the $250,000 Section 179 write-off must be reduced (dollar-for-dollar) for the excess above the $800,000 ceiling.

Another provision in the stimulus package allowed electrical businesses to claim a 50% “bonus” depreciation allowance for newly acquired equipment. To qualify, the equipment must be eligible for depreciation and have a useful life longer than 20 years. Off-the-shelf computer software and improvements made to leased business properties also qualify for bonus depreciation. Best of all, the 50% bonus depreciation applies in both the 2008 and 2009 tax years.

In the fall, Congress passed and President Bush signed into law a historic financial markets rescue bill, the Emergency Economic Stabilization Act (EESA) of 2008. Although the new law's primary purpose was to solve the credit crunch in the financial markets, it also served as one of the largest tax bills in recent history. Included were almost 300 changes to tax laws, tax breaks expected to save taxpayers a whopping $150 billion. Designed specifically for small contractors, business owners, and professionals who are, according to lawmakers, the ones with large amounts of deposits at risk, the bailout bill raised the FDIC and National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000. Remember, however, the increased levels are only temporary, expiring after 2009.

Leasehold improvements

Several energy-efficiency and energy property tax incentives, including those for solar projects, are available for customers looking to defer some of the installation costs.

As mentioned previously, earlier tax law changes shortened the cost recovery period for improvements made to leased business property from 39 to 15 years. The new law not only extends the faster write-offs for those so-called “leasehold improvements” until the end of 2009, but it also allows retail businesses and restaurants to benefit from similar shortened recovery periods.

Because electrical contracting firms lease property and improvements to qualify for the faster write-off, they will share in tax savings estimated to reach $8.7 billion over 10 years. The shorter 15-year write-off period, for more permanent types of improvements to leased or retail locations, is good only for the 2009 tax year, however. On the other hand, the retail property write-offs apply to owner-occupied businesses as well as leased establishments.

Tax benefits for energy savings

The tax law changes also extended a number of energy tax incentives, many of which apply to electrical contractors. Quite a few extensions go beyond the one- or two-year periods authorized by lawmakers for non-energy extenders.

Among the provisions extended were several energy-efficiency and energy property tax incentives. For example, an eight-year extension of investment credits for solar energy was extended, as were breaks for wind, geothermal, and other alternative sources. In addition to tax credits for using solar or alternative energy in the business (see Photo above), there is also a unique tax deduction available to anyone making a commercial building more energy efficient.

Tax deductions for energy-efficient buildings have been extended through Dec. 31, 2013 and are expected to generate tax savings in excess of $890 million over a 10-year period. Rather than a deduction for the cost of equipment or improvements to make a commercial building more energy efficient, the deductible is up to $1.80 per square foot of building floor area for buildings achieving a 50% energy savings target. A lesser flat-rate deduction is available for achieving smaller energy savings.

Under the tax rules, to qualify, energy savings must be accomplished through energy and power cost reductions for the building's heating, cooling, ventilation, hot water, and interior lighting systems.

The new markets tax credit and more

The New Markets Tax Credit is one of the few incentives in U.S. tax law to encourage taxpayers to invest in or make loans to small businesses in economically distressed areas. Created to increase investment in low-income communities, the total credit equals 39% of the investment over seven years.

Set to expire at the end of 2008, the New Markets Tax Credit was extended through December 2009, generating an expected tax savings of $1.3 billion over 10 years. Because financing is difficult to obtain for all businesses, this is yet another avenue that electrical contractors, among others, can tap into. If they qualify, the tax credit for investors means more money should be available to them.

Other tax provisions contained in last fall's EESA might be of limited benefit to an electrical contractor or business. They include:

The downside of tax savings

Enhanced charitable deductions for qualified computer contributions to schools.
Investments in recycling: Businesses can claim accelerated depreciation for purchases of equipment used to collect, distribute, or recycle a variety of commodities.