Pit & Quarry, February 2016

BUSINESS By understanding new and long standing tax laws producers can successfully recoup the maximum amount for equipment and land improvements BY MARK E BATTERSBY A s many in the aggregate industry have learned our ever changing tax rules make it difficult to get the full tax deduction producers are entitled to for the equipment and property that are so essential to every operation The so called extenders tax law that passed late in 2014 did extend the first year write off for so called Section 179 expenses and bonus depreciation but only for the 2014 tax year Unless new legislation is passed most crushed stone sand and gravel producers must be content with the traditional methods for recouping the cost of business equipment and property Although the current tax rules allow expenditures of up to 25000 to be expensed or written off in the current tax year the cost of most tools equipment and even land improvements above that amount can only be recovered via depreciation deductions Depreciation fine print Although land usually isnt depreciable because it doesnt have a definite life the cost of improvements to that land as well as other business property can be depreciated so long as they have a useful economic life exceeding one year and wear out or become obsolete over time In general the Modified Accelerated Cost Recovery System MACRS is used to calculate depreciation deductions for U S tax purposes Depreciation begins when business property is placed in service In other words when it is ready and available for use In addition to knowing when property was placed in service and determining the amount of depreciation allowed the aggregate operations basis in the property as well as its class must be determined Basis is the operations investment in the depreciable property and the initial basis depends on how it was acquired With purchased property for instance the basis is generally its cost MACRS dictates the class and depreciation method for all business property prescribing the number of years over which the cost may be recovered Nine different property classes are defined under the MACRS General Depreciation System GDS In some situations an aggregate producer can choose to use an Alternative Depreciation System ADS for some property Figuring depreciation under the ADS method essentially slows the annual write off preserving larger depreciation deductions for later years Identifying the proper class of business property is essential A tractor used over the road is usually considered to be three year property while trucks are classed as five year property Fencing machinery and equipment fall into the seven year category while water wells drainage facilities and paved lots are 15 year property Commercial buildings have a 39 year useful life Whos equipment is it Depreciation deductions and write offs can only be claimed by the owner of the property Because it is not at all unusual for an owner or shareholder to purchase the equipment the aggregate operation uses the Internal Revenue Service IRS often sees a problem This type of transaction is not a problem for a sole proprietorship because the business and the owner are one in the same An incorporated aggregate operation or a partnership may on the other hand run afoul of the tax rules After all the depreciation deduction belongs to the owner as would the interest on the loan or any lease payments A dilemma commonly arises when a business owner cant buy the equipment in the business name because of credit issues or when the equipment is purchased before the corporation or partnership exists Our tax laws recognize the second issue allowing a tax free transfer of equipment Most states also contain sales tax exemptions for such transfers There may be other options such as retaining ownership of a vehicle and having the business reimburse the operator for the business use Or having the business reimburse the owner for the purchase To maintain flexibility every aggregate producer should make sure all lease contracts or loan agreements allow the transfer of ownership Tax write offs 76 PIT QUARRY February 2016 www pitandquarry com ISTOCK COM ASERGIEIEV