Skip navigation

A Taxing Subject

More than one reader has queried the editors of Electrical Wholesaling regarding potential selling tools associated with the economic stimulus bill signed into law last March. The bill, the “Job Creation and Worker Assistance Act” (H.R. 3090), includes a provision for a bonus 30-percent first-year tax deduction for business property with less than a 20-year tax life.

Certainly, for distributors and their customers wanting to upgrade facilities with new computer systems, energy-efficient lighting, HVAC or building management systems, this provides an additional tax incentive. Equally as important, though, are tax enticements worth pointing out to customers to help spur your sales.

“Initially, the bill was only for new business property,” said Ed Gray, director of energy policy with the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., which campaigned for certain points that made this bill more valuable for electric utilities and electrical manufacturers.

“We were looking for facility upgrades — like lighting in a commercial building or substations, for example,” said Gray. “We got the bill changed to include facility upgrades. That made it far more powerful for electrical manufacturers.”

Keep in mind, though, that the tax law excludes upgrades that are considered to be part of a commercial building itself because a commercial building's tax life is greater than 20 years.

“Twenty is the magic number for this law,” said Gray. “In talking with tax experts, the only thing that they could think of that could be a problem is property that becomes part of a building,” he said.

The following example shows what the provision means for the taxpayer:

Assume that on March 1, 2002, a taxpayer acquires and places in service qualified property that costs $1 million. Under the provision, the taxpayer is allowed an additional first-year depreciation deduction of $300,000 (30 percent of $1 million). The remaining $700,000 of adjusted basis is recovered in 2002 and subsequent years pursuant to current depreciation rules.

“This law says the first 30 percent of the capital cost of the asset is depreciated in the first year and the remaining 70 percent is depreciated by the current rules,” said Gray.

Current rules allow for higher depreciation rates for short-life property (10 years and less) than long-life property. Therefore, the bill has a tremendous impact for long-life property. It doesn't really change its tax life, but from a cash-flow basis, it effectively almost reduces it by half.

“For short-life property, it also gives a lot more bang in the first year,” said Gray.

Intended to stimulate the economy after 9-11, the bill's bonus tax depreciation allows for qualified property acquired between Sept. 11, 2001 and Sept. 11, 2004 and placed into service before Jan. 1, 2005.

A further one-year extension of the “placed into service” date for certain long lifetime equipment was successfully drafted and advocated by NEMA. For a long-life property, businesses have an extra year to place the property in service — until Jan. 1, 2006.

That was good news — especially for utilities.

“In electric utilities, all the transmission and distribution property currently has a 20-year tax life,” said Gray. “So, electric utilities can and are right now using this law to upgrade their transmission and distribution system because it gives them a dramatically better situation than they had prior to this. There are a lot of (transmission) upgrades needed that haven't been done.”

Another provision allows electric utilities to use equipment in inventory prior to Sept. 11, 2001 and “self construct” facility upgrades during the four-year period.

Indeed, the Edison Electric Institute (EEI), Washington, issued a press release praising Congress at the time the legislation passed. “The bonus depreciation incentive for new construction, transmission upgrades, distribution, and other property is important for several reasons,” it said.

For factories buying adjustable speed drives, controllers and other products to automate their factories, those facility upgrades would be also included in this deduction.

Another thing to consider is that the tax law became effective when President Bush signed the bill. Businesses that purchased business property with a tax life of less than 20 years after Sept. 10, 2001, and then put it into service before the end of 2001, may want to file an amended 2001 tax return to get their bonus deduction.

Of course, make sure you talk with your tax expert to clarify any questions and uncertainties that you may have.

TAGS: Archive
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.