Stimulate Your Economy
By Mark E. Battersby
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. At the heart of the package, tax rebates are scheduled to be distributed beginning in early May. The tax breaks for businesses such as car wash operations are retroactive to the beginning of 2008.
The plan provides rebates of up to $600 for individuals and up to $1,200 for couples filing jointly, with an additional payment for families of $300 per child, and a minimum payment of $300 for individuals who pay less than that in income taxes. Unfortunately, payments will be reduced for individuals with adjusted gross incomes above $75,000 and couples with incomes above $150,000, with the wealthiest taxpayers receiving nothing.
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 an investment limit increased from $400,000 to $800,000. It also allows a 50-percent bonus depreciation deduction for businesses buying major equipment, but only for 2008.
Bonus depreciation equal to 50 percent on new equipment is available but the new property must have a depreciable life of 20 years or less. The bonus depreciation also applies to 2008 purchases only.
Naturally, as with many of the options in our tax laws, every car wash operator will have to decide for him- or herself if the new limits will aid in stimulating the economy of their car wash or automotive detailing operation.
Generally, the cost of equipment used in the car wash operation or in any trade or business is recovered via depreciation deductions spread over the useful life of that equipment. Under the current tax rules, an expense deduction — in other words, an immediate write-off — is available for car wash operators who choose to treat the cost of newly acquired equipment and property, called Section 179 property, as an expense rather than a capital expenditure.
Thus, in lieu of depreciation deductions spread over a number of years, the tax rules allow operators with sufficiently small amounts of annual investment the option of deducting (or expensing) equipment and property under Section 179 of the tax law. In general, property qualifying for this immediate deduction is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business.
This meant that the cost of equipment, and in some cases, software, can be an expense on the annual
tax return, rather than written-off as depreciation over a number of years. Originally designed to encourage small businesses to acquire additional property and equipment, the Section 179 write-off now has been raised from the old $125,000 limit to $250,000.
Also increased — from $400,000 to $800,000 — was the investment ceiling, above which the Section 179 write-off is reduced, dollar-by-dollar, by the amount that total equipment or property acquisitions exceed that ceiling. Thus, a car wash operation that purchases equipment in amounts greater than $800,000 for the year will hit the ceiling and find the Section 179 expensing election reduced accordingly.
The other business provision contained in the new economic stimulus package, a 50-percent “bonus” depreciation deduction
for qualifying, new depreciable property placed in service during 2008 is allowed. The deduction for the cost of property is claimed after reduction by any Code Section 179 allowance. 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. Many car washes have attempted the equipment write-off for buildings that are an integral part of the car wash operation.
Similarly, the courts have recently begun allowing businesses to depreciate “components” of buildings separately, 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, the ventilation system of an ore-processing plant — 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, 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.
JUST SAY NO TO TAX WRITE-OFFS
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 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.
Consider a start-up car wash operation’s first expenses. The operator of any startup business has the option of deducting up to $5,000 in start-up and organizational expenditures in the year the business opens its doors or begins operations. But why would they want to? If the new enterprise has income, it will likely find itself in the lowest tax bracket. If those start-up expenses are ignored in the first year they — and any start-up expenses that exceed $5,000 — will be available for deduction ratably over the following 180-months. Thus, the $5,000 deduction deferred until later, hopefully more profitable years, will help reduce income that will be, in all-likelihood, taxed at a higher rate than it would as a start-up.
As many car wash operators are aware, the tax rules allowing for the recovery of amounts spent for equipment do not match tax depreciation with economic depreciation. The write-off period for newly acquired capital assets differs greatly between the period when the building, fixtures, or equipment will contribute to the car wash 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 car wash 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.
Remember, however, neither accelerated depreciation nor the first-year write-off is mandatory. Although depreciation deductions do not have to be claimed, they do “accrue” and figure in the computation for gain or loss when property is eventually sold, abandoned, or otherwise disposed of.
Fortunately, a car wash operator can ignore the standard system of depreciation, choosing instead a slower, even write-off such as the straight-line method. The Internal Revenue Service reportedly looks more closely at any car wash operation or business choosing an alternative depreciation method such as straight-line depreciation rather than using the no-questions-asked modified asset cost recovery system, but the lower tax bills in later, more profitable years, might be worth it.
Also, keep in mind the total cost of property that may be expensed in any tax year cannot exceed the total amount of taxable income derived from the active conduct of any trade or business during the tax year. An amount disallowed as the result of the taxable income limitation may of course be carried forward to a more profitable tax year.
The deduction for carry-forwards and the amounts expensed for qualifying property placed in service in a carry-forward year may not, however, exceed the maximum annual dollar cost ceiling, investment limitation or, if lesser, the taxable income limitation.
The Economic Stimulus Package of 2008 is a reality and there is more to it than merely rebates. The limited tax breaks for car washes and other businesses include a 50-percent bonus depreciation deduction for new equipment placed in service, saving businesses an estimated $42.3 million in 2008. Businesses will also be permitted to fully expense (immediately deduct) up to $250,000 of both new and used business property, saving them almost $1 billion.
Left unanswered by our lawmakers are a number of questions including: how can a troubled car wash operation or business afford new equipment or property acquisitions; where will a car wash operator find financing for additional equipment; and, most importantly, will those new write-off limits
and bonus depreciation really stimulate the economy of your car wash operation?
Mark E. Battersby is an Ardmore, PA-based freelance writer who specializes in finance and tax issues.