Federal Tax Reform
Elements of fiscal cliff deal could benefit rental
In order to avoid the repercussions of the "fiscal cliff," legislators passed H.R. 8: American Taxpayer Relief Act of 2012 on Dec. 31, 2012. This bill addresses three items that have been key issues of concern for the American Rental Association (ARA) and the equipment rental industry for the last several years. Below is a brief overview of each provision. ARA recommends you consult your tax advisors for further information on how they can impact your business.
The 50 percent bonus depreciation allowance has been extended through 2013. This provision provides equipment rental businesses with 50 percent bonus depreciation for capital investments placed in service after Dec. 31, 2011, and before Jan. 1, 2014. Bonus depreciation applies to new equipment only and does not include used equipment or software.
“This provision is very timely for members who are anticipating the purchase of new equipment at The Rental Show in February,” says John McClelland, ARA’s vice president for government affairs.
Section 179 has been extended for both 2012 (retroactively) and 2013.
- These deductions are available for most new and used capital equipment and some software.
- The 2012 deduction limit has been raised to $500,000 retroactively, which means qualifying purchases made in 2012 now fall under the higher deduction limit.
- The 2013 deduction limit also is $500,000 with a $2 million limit on capital purchases.
The estate tax has undergone some modification in H.R. 8. The exemption of $5 million per person has been made permanent. However the maximum rate on estates greater than $5 million has increased from 35 percent to 40 percent. If H.R. 8 had not been enacted, the estate tax would have reverted to a $1 million exemption with a top rate of 55 percent.
“Making the estate tax exemption permanent at $5 million was a major victory for small business interests and the increase in the top rate to 40 percent was a small price to pay for the certainty of a permanent provision in the tax code,” McClelland says.
“As rental and supplier businesses plan for 2013 in particular, these provisions of tax law will be of assistance. The ARA has worked tirelessly on behalf of our membership to gain permanency to the estate tax, and now estate planning can take place with certainty,” says Christine Wehrman, ARA's executive vice president and CEO. “In addition, bonus depreciation and Section 179 are beneficial for keeping the rental inventory current for businesses to remain competitive and to keep manufacturers steadily providing innovative products to the rental channel.”
ISSUE BRIEF: Federal Taxes and Tax Reform
Rental businesses, of all sizes are sensitive to changes in the tax code. All rental businesses require significant capitalization, thus provisions that affect depreciation and expensing rules can have a significant impact on capital formation in the rental industry. Estate taxes affect rental businesses as they try to pass ownership to the next generation.
There have been some significant discussions among leaders of the Congressional tax-writing Committees, House Ways and Means, and Senate Finance. Tax reform could take many forms and could include provisions that are linked to health care reform as well as changes in personal income tax rates. There have been several proposals to lower the corporate rate from 35 percent to as low at 28 percent. These discussions are partly a recognition that the U.S. has some of the highest corporate tax rates in the industrialized world.
Cost recovery on real estate property occurs over 39 years. Recently, some businesses, notably restaurants, have been granted a 15-year recovery period for certain qualifying leaseholder improvements. The tax code should be revised to allow businesses to depreciate real property and improvements to real property in 15 years. This will increase business investments in physical plants and expand businesses that are currently discouraged from expanding because of unfavorable depreciation rules. The Economic Stimulus Act of 2008 contains a 50-percent bonus depreciation provision on equipment that was placed in service in 2008. That provision expired on December 31, 2008. ARA supports a 2-year extension of the bonus depreciation provision as part of a new stimulus package for 2009.
Expensing limits of $100,000 annually (indexed for inflation) for small businesses investing less than $400,000 annually, expire in 2009. The Economic Stimulus Act of 2008 included provisions to increase the exemption from $100,000 to $250,000 and the phase out limit from $400,000 to $800,000. Like the bonus depreciation provision, the enhanced Section 179 provision expired on December 31, 2008. Most rental businesses are capital intensive and require significant expenditures each year to replace aging equipment in the rental fleet. The $25,000 annual expensing limit that began phasing out at $200,000 in annual investment is inadequate for small businesses competing in today’s economy. ARA supports making the current Section 179 provision permanent and increasing the expensing limit to $250,000 annually and the phase-out limit to $800,000 of annual investment with both levels indexed for inflation.
These provisions have helped reduce taxes paid by small rental businesses. They have also created and continue to maintain long-term uncertainty for small business owners. The goals of ARA’s tax policy positions are to reduce tax burdens on small rental companies and establish stable policies that allow them to plan the future courses of their businesses.