Here are some updates to the tax law and some new incentives for 2009 –
Extension of the Commercial Building Tax Deduction
The Emergency Economic Stabilization Act (EESA) of 2008 (also known as HR-1424) extends the benefits of the Energy Policy Act of 2005, including the CBTD, until December 31, 2013.
The Commercial Building Tax Deduction (CBTD) establishes a tax deduction for expenses incurred for energy efficient building expenditures made by a building owner. It provides up to $1.80 per square foot to owners or designers of new or existing commercial buildings that make qualified improvements that save at least 50% of the heating and cooling energy of a building that meets ASHRAE Standard 90.1-2001. Partial deductions of up to $.60 per square foot can be taken for measures affecting any one of three building systems: the building envelope, lighting, or heating and cooling systems.
Extension of the Commercial Building Tax Deduction
Combined heat and power (CHP), or cogeneration, systems are designed for specialty commercial, residential, and municipal applications. CHP systems are highly efficient means of producing electricity and useful thermal energy, including heating and cooling, from a single fuel source. EESA authorizes a $1500 tax credit for building owners that install CHP systems.
Under EESA, this credit is applied retroactively for expenditures made after January 1, 2008 and expires on December 31, 2016.
Qualified Energy Conservation Bonds and Qualified Zone Academy Bonds
EESA creates a new category of tax credit bonds, named Qualified Energy Conservation Bonds, to finance State and local government’s initiatives designed to reduce greenhouse emissions, including the costs of improving energy consumption in public buildings. Tax credit bonds accumulate interest for the bond holder, which is used as a credit against federal taxes owed. EESA sets aside $800 million in bonding authority for the Qualified Energy Conservation Bonds.
EESA also extends the authority for school systems with low-income populations to issue $400 million in Qualified Zone Academy Bonds in 2008 and 2009. Qualified Zone Academy Bonds may be used for a variety of purposes, including building renovation and repair.
15-Year Depreciation for Qualified Leasehold, Restaurant, and Retail Improvements
A provision in the American Jobs Creation Act of 2004 shortened the depreciation period for qualified improvements to leasehold and restaurant property from 39 to 15 years. The provision applied to improvements that included new HVAC systems or refrigerators, and expired December 31, 2007; the EESA reinstated the allowance for the accelerated depreciation for leasehold and restaurant improvements retroactively from January 1, 2008 until December 31, 2009.
EESA also expanded the depreciation allowance to include improvements to retail buildings and new restaurants for 2009.
The IRS has posted a matrix to advise operators how to recover costs through depreciation of tangible property used in the operation of a restaurant business.
An asset that is classified I.R.C. Section 1245 property has a shorter cost recovery period property of 5 or 7 years, whereas Section 1250 property has longer cost recovery period property, at either 39, 31.5 or 15 years. The most common example of section 1245 property is depreciable personal property, such as equipment. The most common examples of section 1250 property are buildings and building components, which generally are not section 1245 property.
Below are examples of some cost segregation in the restaurant industry. For a complete list, refer to the IRS Website.
Beverage Equipment – Equipment for storage and preparation of beverages and beverage delivery systems. Beverage equipment includes the refrigerators, coolers, dispensing systems, and the dedicated electrical, tubing or piping for beverage equipment. The dispensing system may be gravity, pump or gas driven. Property Type: 1245 – Distributive Trades and Services; Recovery Period: 5 Years
Food Storage and Preparation Equipment – Food storage, cleaning, preparation, and delivery systems including all machinery, equipment, furniture and fixtures used to process food items from storage through delivery to the customer. Property Type: 1245 – Distributive Trades and Services; Recovery Period: 5 Years
Furnishings – Booths, tables, chairs, lockers, benches and other furniture needed in the business operation that is not a building component. Property Type: 1245 – Distributive Trades and Services; Recovery Period: 5 Years
Restroom Accessories – Includes paper towel dispensers, electric hand dryers, towel racks or holders, cup dispensers, purse shelves, toilet paper holders, soap dispensers or holders, lotion dispensers, waste receptacles, coat hooks, grab bars, mirrors, shelves, vanity cabinets, counters and other items generally found in public restrooms that are built into or mounted on walls or partitions.
Property Type: 1250; Recovery Period: 39 Years – Building or Building Component
New Equipment Deductions
Instead of writing off new equipment purchases over 5 years, like most tangible personal property, you can deduct up to $125,000 right away with the Section 179 deduction. Ask your tax advisor if you have enough income to cover the deduction.
Increased 179 Deduction – EZ and RC businesses can take an increase in deduction up to $35,000 of the cost of eligible equipment purchases, subject to certain limitations, in the placed-in-service year of the equipment in an EZ or RC. Available for equipment placed in service after December 31, 2001, and before January 1, 2010. Full benefit if $160k-$1 mil of eligible equipment is purchased and placed in service in 2007. Must be eligible “EZ or RC business” (see IRS Pub. 954 for requirements.
Employee Tax Credits
Empowerment Zone Employment Credit – The EZ/EC Initiative is an interagency effort focused on the creation of self-sustaining, long-term development in distressed urban and rural areas throughout the United States. Businesses can take an annual tax credit of up to $3000 for each employee who lives and works for the employer in an Empowerment Zone (EZ). Available through December 31, 2009.
Work Opportunity Tax Credits – Businesses can take a tax credit of up to $2400 for the first year of employment of each 18-to-39 year-old new employee who lives in an RC or EZ. WOTC is available for employees who begin work before September 1, 2011.
Employers can verify their business location and employee’s address as being inside the RC or EZ on HUD’s Address Locator.