My associate Steve Pierson, CPA that has worked with me for 20+ years, is one of the premier tax folks when it comes to equipment distribution. If he hangs with me that means lift trucks, construction equipment and rental companies. We have been through the wars together and the ever changing tax climate that every equipment dealer faces and will continue to face. In addition, Steve is great when it comes to tax planning achievable via equipment ownership and has been involved one-on-one with the IRS and Congressional Committees that formulate and change tax our tax laws.
I asked Steve if he would put his thoughts on what may transpire in 2015 in terms of changes directly related to equipment, and you will find his comments below.
One issue many dealers will wind up with are deferred taxes resulting from the use of Bonus, Section 179 and 1031 Like-Kind Exchange. If this is a big issue for you it may be in your best interest to have Steve review your position and offer up suggestions on how to best mitigate the reversal of these deferrals.
It is going to be a tough tax planning year for distribution and rental equipment businesses with the sunset of many depreciation related provisions (under the “Tax Increase Prevention Act of 2014”) on December 31, 2014. It seems for certain that since the Act extended bonus depreciation, alternative minimum tax relief on depreciation and the more generous allowance of Section 179 expensing for only one year (originally scheduled to end December 31, 2013, the Act extended the depreciation tax benefits to end December 31, 2014), that Congress and the White House are planning tax reform or potential tax overhaul in 2015.
So where are we at today?
In 2015, we have the MACRS class lives (5 years for construction equipment) with no bonus depreciation and a reduced Section 179 expense election so small that isn’t worth mentioning for purposes of this article.
The basis for depreciation will be rooted in the depreciation rules as they existed before the bonus depreciation allowances were in effect. This means that most equipment placed in service in 2015 will be depreciated at 20% for the first year. Beware that the alternative minimum tax depreciation will be only 15% in the first year. Any equipment that had been placed in service before 2015 will be depreciated under the MACRS rules over the remaining basis and lives of the assets.
What might we see in 2015?
Two proposed bills were introduced 2 years ago, one from the House Ways and Means Committee and one from the Senate Finance Committee, which shed a little light on what we can expect in the way of tax reform in the near future if not potentially this year. The House proposal would use existing depreciation lives but allow depreciation only on a straight line basis instead of the 200% declining balance method presently allowed under MACRS. The Senate proposal had a method of depreciation that has not been introduced in our tax law before that would group assets in categories and depreciate those assets on a straight line basis over an extended period of years. The calculation would be made on the year end net basis amount in that asset category. The net basis amount would be the net of previous purchased assets less accumulated depreciation at the beginning of the year plus current additions less the sales price of the assets sold in that year. This depreciation amount keeps diminishing as the net asset basis is reduced by previous depreciation. This method also serves to act as a deferral of gains on the sale of equipment since the sale is not recognized but used in the computation of the depreciation deduction.
I’ve calculated the depreciation effect of each of these proposals and the depreciation is far less than what is allowed under current tax law even without the bonus depreciation. On a positive note, both proposals have provisions that would allow for an increase in Section 179 expense allowances. These increased 179 expense allowances would exceed the 2014 levels.
In addition, both proposals call for the elimination of both the LIFO inventory reserves and the benefits of tax deferral of gains on the sale of equipment under the current provisions of Section 1031.
The trade off in the proposals for these reduced depreciation benefits and other negative changes are reduced corporate and individual tax rates. Unfortunately, history will tell us that when tax reform reduces tax breaks in exchange for reduced tax rates that the tax rates will gradually increase in future years with no corresponding restoration of the original tax breaks.
Will we see these changes in 2015? My guess is no. These type of far reaching potential changes would most likely be enacted to be effective in 2016 or perhaps even beyond.
Right now we have our old MACRS provisions without the benefit of bonus depreciation. Our planning should be based on these MACRS methods and consideration of the incorporation of a Section 1031 program to reduce the tax effects of depreciation without bonus in 2015.
Steve Pierson is a Shareholder VP at Selden Fox Ltd. Contact Steve at 630 054 1400. Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail firstname.lastname@example.org to contact Garry or Steve.