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(An engineering/valuation consultant’s perspective)
July 15, 2002
Written by Cal Fugitt

“The Job Creation and Workers Assistance Act of 2002” will have a dramatic impact on capital cost recovery and should result in job stimulus through investment in new plant and property. Some might characterize this legislation as generous but it is certainly important considering the events of September 11th and subsequent economic woes.

The “act” covers many business incentives and fixes some issues that were troublesome in the “Bush Tax Cut” bill passed in the summer of 2001. Our focus for this paper is the impact on the purchase of newly acquired business assets, including purchased software and leasehold improvements, covered in the 2002 Act.

The new rules are retroactive to September 10, 2001. It may be worth amending your 2001 tax return if already filed, to take advantage of the new rules. It may be an inconvenience but well worth the effort if the benefits are material. It is unclear how the various State Taxing Authorities will react.

The “act” or new law, allows taxpayers to immediately deduct 30% of the cost of qualifying assets. The remaining 70% is then depreciated or amortized over the number of years specified by the existing MACRS (Modified Accelerated Cost Recovery System).

Guidelines for eligibility include:

1. Assets must have a recovery period of 20 years or less. The majority of business assets will pass this test. Some leasehold improvements and purchased software (other than software acquired as part of an overall business purchase transaction, which are subject to a special 15-year rule under Section 197) are also included.

2. Qualifying assets must have been purchased after September 10, 2001 but before September 11, 2004. Assets acquired under a binding contract entered into between those dates will pass the test.

3. The original use of these qualifying assets must commence after September 10, 2001. This means that assets must be new rather than reconditioned or rebuilt. However, certain costs to rebuild or recondition existing assets may also pass the original use test and thus qualify for the 30% immediate write-off.

4. Qualifying assets generally must be “placed-in-service” no later the December 31, 2004. Extension of that deadline to December 31, 2005 is allowed for certain transportation assets and other property with recovery periods of ten or more years. Under this extended deadline only costs incurred before September 11, 2004 will be eligible for the immediate 30% deduction.

These new breaks should not have any negative impact on taxpayer’s in AMT (Alternative Minimum Tax). The same treatment will apply for AMT when an asset qualifies for the 30% immediate write-off.

If you are building new facilities or improving owned or leased facilities, and fit within the guidelines of these new rules, it will make more sense than ever to maximize these deductions. Tax savings through reclassification are possible by finding longer lived-assets that can be legitimately changed into shorter-lived categories. The obviously qualifying assets include plant machinery & equipment, office furniture, technology-oriented equipment, etc. and will all qualify. Examples of hidden assets include electrical, data cabling, built-in furniture, certain plumbing items, certain concrete support work that are specifically installed for the process or function of qualifying assets, and many other items we find hidden or buried in construction trade accounts. Don’t forget that other land improvements have a fifteen year life and should qualify for this “post 9/10” tax treatment. A lot of land improvement costs are hidden in construction trade accounts that will otherwise be categorized as 39-year lives for tax and not qualify for this shorter-lived treatment.

The benefit of the “act” for straight personal property purchases is clear. You get a 30% deduction now. The remaining 70% is depreciated over the appropriate tax life. Depending on the category and the organizations effective tax rate, this can equate to a benefit in the 11% range (essentially a credit).

The benefit for “other improvement projects” with a 15 (not to exceed 20) year life, the benefit is much more dramatic. Our calculations show incremental benefit in the 30 to 35% range over normal lifing and depreciation guidelines.

The benefit of finding or reclassifying categories in conjunction with a cost segregation analysis, with hidden shorter-lived assets buried in construction trade lines is huge. Electric service for Machinery & Equipment installations, machine foundations, telephone infrastructure and many more items we find for depreciation “cash flow” enhancement now have tremendous importance in your post construction or planning phase.

The opportunity to reclassify assets from I.R.C. Section 1250 to 1245 property originated during the early days of the Investment Tax Credit (ITC). The new “act” is comparable or better in many respects. Capital Cost Recovery Services involves finding and supporting these otherwise hidden or process related assets buried in overall trades accounts. It requires in-depth knowledge of engineering, construction and appraisal as well as tax expertise. The services are not an “accounting for tax” service line. It is an often-overlooked function that is worth exploring. Contact us for more information.

Note: This paper is a non-CPA perspective. Readers should consult with their tax accountant or advisor and review the “act’ in detail for clarification. Cost Tech Consulting is a Capital Cost Recovery firm specializing in providing engineering and appraisal services related to Cost Segregation, purchase price allocation, property records review and depreciation consulting.


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