For contractors in many parts of the country, spring ushers in a hopefully busy construction season. And, for those in warm-weather climates, spring is still a time when the beginning of the year is over and local markets are really starting to take shape.
However your construction business fits into this paradigm, what you do in the coming year will have a big effect on your 2011 tax bill. So it's important to keep your eye on the ball as the months progress — particularly in light of tax law changes that were passed last year.
Benefiting from a bonus
If you've bought any equipment or other substantial assets in recent years, you may have made use of the 50% bonus depreciation allowance.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily increases bonus depreciation to 100%, generally for qualifying assets placed in service after Sept. 8, 2010, and before Jan. 1, 2012. In addition, the act allows 50% bonus depreciation (which had been set to expire after 2010) for eligible assets put in service in 2012 (2013 for certain long-lived property). Qualifying assets generally include:
New tangible property with a recovery period of 20 years or less (such as most equipment and office furniture),
Off-the-shelf computer software,
Water utility property, and
Qualified leasehold-improvement property.
If your construction company is incorporated, ask your tax advisor whether you might qualify for accelerating certain credits in lieu of claiming bonus depreciation. The Tax Relief act extended a provision allowing corporations to do so for qualified assets placed in service through Dec. 31, 2012 (Dec. 31, 2013, for certain long-lived and transportation property).
Sticking with Sec. 179
The Small Business Jobs Act of 2010 (SBJA) improved another asset-related tax break. The Section 179 expensing deduction allows you to immediately write off the full price of an eligible asset rather than depreciating it over several years — assuming you don't exceed certain limits in making the purchase.
The SBJA doubled the Sec. 179 expensing limit from $250,000 to $500,000 for assets placed in service in tax years 2010 or 2011. It also increased the expensing phaseout threshold from $800,000 to $2 million.
The Tax Relief act prevents the Sec. 179 limit from falling to $25,000 with a $200,000 phaseout in 2012 as previously scheduled. Instead, the limit will be $125,000 in 2012 with a $500,000 phaseout (both inflation indexed).
Planning accordingly
So, will bonus depreciation or Sec. 179 expensing provide you a bigger benefit? For 2011 (when bonus depreciation is 100%), if a purchase qualifies for both, there essentially will be no tax-saving difference. But keep in mind that bonus depreciation is available for only new assets, whereas Sec. 179 expensing is also available for used assets.
On the other hand, there's no limit on the amount of assets that can qualify for 100% bonus depreciation, whereas asset-purchase limits apply to Sec. 179. (Beware of the state tax impact, however.)
Also, consider that Sec. 179 expensing is available only to the extent that your construction business has net taxable income. That is, your Sec. 179 deduction may apply only to bring taxable income down to zero and can't create or increase a net operating loss (NOL) for tax purposes. This rule doesn't apply to bonus depreciation, which can drive your taxable income into negative numbers. In doing so, bonus depreciation can create an NOL that you can carry back to potentially receive a tax refund now or that you can elect to carry forward to offset income in future years.
The bottom line on both bonus depreciation and Sec. 179 expensing: If you're already considering buying a substantial asset for your construction business, you have a tax incentive to do so this year. But, as always, consider the cash flow ramifications of any major purchase.
Looking into other breaks
There are several other tax-planning areas to keep an eye on during the coming year. These include:
Hiring. The Work Opportunity credit has been extended to qualifying hires made through Dec. 31, 2011. The credit generally equals 40% of the first $6,000 of wages paid to qualifying employees ($12,000 for wages paid to qualified veterans), such as food stamp recipients, disabled veterans and ex-felons.
Research and development. Is your construction company working on a new building technique, tool or software application? The research credit has been extended through 2011. It's generally equal to a portion of your qualified research expenses, including salaries allocable to such research. But the calculation is complex; ask your tax advisor for details.
Marketing. If you work with owners or developers with leasehold-improvement, restaurant and retail-improvement property, get the word out: The SBJA allows up to $250,000 of such property to be expensed under Sec. 179 for 2011 in certain cases (but not for 2012) or allows the property to qualify for bonus depreciation.
In addition, the Tax Relief act extends the accelerated depreciation (a shortened recovery period of 15, rather than 39, years) available for these types of property through 2011. So now may be a good time for owners and developers to undertake such projects.
Extending some opportunities
As your construction company soldiers through a (we hope) busy year, there are a number of tax-saving opportunities you may be able to take advantage of. Your specific circumstances will guide your best options, however, so don't hesitate to contact our office with questions or ideas.
Note: Will you benefit from the retention credit?
The payroll tax forgiveness for new hires that was provided under the Hiring Incentives to Restore Employment (HIRE) Act of 2010 hasn't been extended. But, if you hired workers in 2010 who qualified for payroll tax forgiveness, you might qualify for a retention credit of up to $1,000 per retained worker on your 2011 return.
You'll need to retain the worker for at least 52 consecutive weeks and pay him or her wages equal to or exceeding at least 80% of what you paid the worker during the first 26 weeks. Keep in mind that no partial credit is available if the worker leaves before the end of the 52-week period — even if the departure was voluntary.
