Law could provide tax relief for aggregate producers

By |  April 6, 2016

PQ0316_iStock-taxes-736x375Once again, lawmakers waited until late in the year to pass another “extenders” bill. The new “Protecting Americans from Tax Hikes (PATH) Act of 2015” retroactively extends the 50 or so temporary tax provisions that are routinely extended on a one- or two-year basis.

And beginning with the Forms W-2, W-3, and returns for reporting non-employee compensation (e.g., Form 1099-MISC) that are to be filed for the 2016 tax year and later, PATH will require them to be filed on or before January 31 of a given year. No longer will they be eligible for the extended filing date for electronically filed returns.

Also extended by PATH are a couple of provisions that may or may not benefit aggregate mining operations. The mine rescue team training credit has been extended through 2016 and allows operators to claim a tax credit for the lesser of $10,000 or 20 percent of the cost of the training program. The election to expense mine safety equipment is available for all property placed in service in 2015 and 2016.

First-year write-offs

The so-called “Section 179” deduction allows crushed stone, sand and gravel producers an up-front expense deduction for the entire cost of equipment ranging from computers to vehicles and machinery. The amount allowed as a write off in the first year, instead of slowly deducting or depreciating over several years, is now permanently fixed at $500,000 per year (phased out dollar-for-dollar as expenditures begin to exceed $2 million in a year).

As mentioned, for the 2015 tax year, an aggregates business can expense up to $500,000 in equipment purchases. While the equipment can be new or used, if it is purchased using a trade-in as part of the price, the expense allowance can be taken only on the excess of the cost of the property over the undepreciated cost of the property being traded in. If, for example, a new truck is purchased with a price of $25,000 by paying $10,000 cash and trading in your old truck, the Section 179 expense election applies only on $10,000.

A bonus write-off

Originally created as a short-term stimulus measure, bonus depreciation is back albeit phased out over a five-year period. Bonus depreciation, which permits the immediate deduction of any business equipment expenses, rather than a depreciated tax benefit over time, has been extended at the former 50 percent rate for the 2015 to 2017 tax years, phased down to 40 percent in 2018 and 30 percent in 2019.

Making it even semi-permanent allows businesses that spend heavily on equipment, machinery and other business property to reap large up-front tax breaks. In fact, overall tax savings are predicted to be a whopping $281 billion over a 10-year period.

Many aggregate operations will find the bonus depreciation break may be more valuable than the Section 179 deduction because the Section 179 expensing deduction is limited to the taxable income of the business with any excess carried forward. Naturally, losses generated by the 50 percent bonus depreciation can offset other income. They can also be carried back for two years, thereby generating a refund of taxes paid in earlier years.

Energy-efficient commercial buildings

A provision in PATH extends through the 2016 tax year the above-the-line deduction for the cost of energy-efficient improvements made to commercial buildings. In other words, an aggregates business can now get tax deductions for new or renovated buildings that save 50 percent or more of projected annual energy costs for heating, cooling and lighting compared to model national standards. Partial deductions for efficiency improvements to individual lighting, HVAC and more are also available.

The tax deductible amount is up to $1.80 per sq. ft. and available to either the owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of the heating, cooling, ventilation, water heating and interior lighting energy costs.

A partial deduction of $0.60 per sq. ft. can be taken for improvements made to one of three building systems – the building envelope, lighting and heating/cooling. The partial building improvement must reduce total heating, cooling, ventilation, water heating and interior lighting energy use by 16.67 percent.

On a related note, the American Society of Heating, Refrigerating and Air Conditioning Engineers’ (ASHRAE) standards required for the energy efficient commercial buildings deduction have been updated in PATH. The provision modifies the deduction by updating the energy-efficiency standards to reflect new ASHRAE standards beginning in 2016.

Energy-efficient fleets

The tax credit for alternate-fuel refueling “property” has been extended as has the biodiesel and renewable diesel incentives. In fact, the existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures has been extended through 2016. This provision also extends through 2016 the 50 cents per gallon alternative fuel tax credit and alternative fuel mixture tax credit.

Another tax credit for buying new qualified fuel cell motor vehicles has been extended through 2016. A credit of between $4,000 and $40,000, depending on the weight of the vehicle, is available when purchasing such vehicles.

The Work Opportunity Tax Credit

PATH retroactively extended and greatly expanded the Work Opportunity Tax Credit (WOTC) through the 2019 tax year. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). In situations where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first- and second-year wages, up to $10,000 per employee.

While the maximum WOTC for an aggregates business hiring a qualifying veteran is generally also $6,000, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.

With individuals who began work after December 31, 2015, the credit also applies to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more). The credit with such long-term unemployed individuals is 40 percent of the first $6,000 of wages.

The built-in gains of ‘S’ corporations

As the economy improves, many aggregate businesses are replacing much of their equipment and other business assets. Unfortunately, many are just discovering a corporate-level tax is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of an aggregates producer operating as an “S” corporation. That built-in gain refers to gains that arose prior to the operation’s conversion from a regular “C” corporation to an “S” corporation, and arises when assets are sold. PATH retroactively and permanently provides a five-year period – the same period that applied to tax years that began in 2014 – for determining the net recognized built-in gain.

In other words, the built-in capital gains of a corporation that has become an “S” corporation must be held for five years in order to avoid the so-called “conversion capital gains tax.” Permanently reducing the “S” corporation recognition period for the built-in gains tax will make it easier for incorporated businesses to become “Subchapter S” corporations and more fluidly change the status of their business entity to respond to changing market conditions.

Small business stock

Many incorporated businesses – start-up or existing – use a unique “small business stock” to finance the growth of their operations. The 100-percent exclusion from capital gains that was allowed on the sale or exchange of qualified small business stock held for more than five years by non-corporate investors has been extended.

Under pre-PATH law, the exclusion for small business stock was limited to only 50 percent of the gain for stock acquired after December 31, 2014. The new PATH Act retroactively and permanently extends the 100-percent exclusion, as well as the exception from minimum tax preference treatment for small business stock acquired by investors in an aggregates business after 2014.

A postponement, but available for 2015 tax year

The so-called “Cadillac Tax,” which was expected to begin in 2018, has been postponed. That means businesses that offer employees expensive health insurance will not have to pay the Cadillac Tax for those plans until 2020. Many employers want the tax repealed altogether.

Which of the provisions of the PATH Act will best help your aggregates business reap its share of the $622 billion in tax savings? Thanks to the complexity of the new law, professional assistance may be required to maximize write-offs for the 2015 tax year, as well as when planning to take advantage of all the benefits your business is entitled to in the years ahead.

 

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years.

Allison Barwacz

About the Author:

Allison Barwacz is the digital media manager for North Coast Media (NCM). She completed her undergraduate degree at Ohio University where she received a Bachelor of Science in magazine journalism from the E.W. Scripps School of Journalism. She works across a number of digital platforms, which include creating e-newsletters, writing articles and posting across social media sites. She also creates content for NCM's Portable Plants magazine, GPS World magazine and Geospatial Solutions. Her understanding of the ever-changing digital media world allows her to quickly grasp what a target audience desires and create content that is appealing and relevant for any client across any platform.

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