Tax Breaks

Thanks to the 100 percent "bonus" depreciation write-offs created by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many within the nursery industry are discovering that capital investments in equipment, machinery and other business assets are more affordable today than ever before. Remember, however, the 100 percent bonus depreciation write-off is available only for qualifying purchases made by growers, garden centers and nursery retailers in 2011.

Those that have hesitated or postponed making capital investments because of the recent economic downturn might now want to consider how the combined use of incentives and the 100 percent bonus depreciation can substantially reduce the cost of capital investments. Even funding those new equipment purchases is easier — at least for a while.
 

Bonus depreciation
Bonus depreciation was originally created in 2002 as a temporary economic incentive by which companies could immediately deduct 30 percent of the basis of qualifying assets that were placed in service after September 10, 2001 and before January 1, 2005. An increase in the percentage of the deduction in 2003 to 50 percent expired in 2005. Reintroduced by lawmakers in 2008, bonus depreciation has subsequently been extended three times.

Although the concept of taking the additional depreciation in the first year is quite simple, changes to the applicable percentage, timeframes during which each is available and variations related to unique types of assets which qualify have made application of the rules somewhat complex.

The definition of property that is eligible for bonus depreciation under the 2010 Tax Relief Act is the same as under prior law, but the percentage and placed-in-service dates have changed. The percentage increased from 50 percent to 100 percent for qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012. Those growers, garden centers and nursery retailers investing in qualifying assets will be able to fully deduct the cost during the current tax year. This will reduce taxable income and taxes paid, resulting in an increase in cash flow which can be reinvested in the business.
 

Expensing write-offs
Last fall's Small Business Jobs Act increased the Section 179, first-year expensing dollar and investment limits to $500,000 and $2 million, respectively, for 2010 and 2011. The Tax Relief Act included a $125,000 dollar limit and a $500,000 investment limit for tax years beginning in 2012 and expiring after December 31, 2012.

Unlike bonus depreciation that applies only to "new" property, a nursery business may immediately deduct as a Section 179 expense, up to $500,000 of both new and used business property placed in service during the tax year. The Section 179 expensing write-off is reduced, dollar-for-dollar, by any property acquisitions in excess of the $2 million investment ceiling, limiting the write-off to smaller businesses.
 

Layering opportunity
It is not only federal tax write offs that can help reduce the cost of capital investments. Many growers making capital investments during the 2011 tax year can also benefit from state and local credit and incentive programs. In fact, many states offer a tax credit equal to a percentage of an eligible capital investment made in that state.
 

Opting out
Although the 2010 Tax Relief Act included the best terms ever for bonus first-year depreciation, namely a 100 percent write-off of the cost of qualifying property, not all nursery businesses will find it desirable to use front-load depreciation deductions. While it is possible to elect out of bonus depreciation entirely it is, at least for now, less certain that a business can step-down from 100 percent to 50 percent bonus depreciation.

The prime example of a situation crying out for a grower, garden center or nursery retailer to opt out of 100 percent bonus depreciation is one where there are about-to-expire net operating losses, the value of which would be lost if current-year income were reduced too much by claiming the maximum depreciation allowance. Similarly, a business that currently is, and in the recent past, has been in a low tax bracket and expects to be in a higher bracket in future years may want to defer depreciation deductions to offset future higher-taxed income.

An election to take a reduced bonus depreciation deduction was specifically authorized under prior law, when a taxpayer could elect 30 percent — instead of 50 percent — bonus first-year depreciation. Until recently however it appeared that the only choice for a nursery business that does not want 100 percent bonus depreciation was to elect out of bonus depreciation entirely. Now, the IRS has decided to follow Congress' "General Explanation" for the 2010 Tax Relief Act and permit a step-down election from 100 percent to 50 percnet bonus depreciation.
 

Discretionary incentives
When it comes to a financial helping hand, the best opportunity for green industry businesses investing in capital improvements may come in the form of discretionary incentives available at the federal, state and local level. Although many of these incentives require some level of job creation or, at least job retention criteria be met in addition to capital investment, there are some notable exceptions.

The Federal New Markets Tax Credit, for example, provides a significant financial incentive for qualified investments made in certain eligible census tracts. Also, Delaware and Virginia offer cash grants based on future capital investment made by existing businesses without requiring a commitment to new job creation.

It is the incentives offered by many local jurisdictions that often provide the most significant level of benefit for capital investment activities. Many municipalities have the ability to offer property tax abatement or tax increment financing as tools to encourage capital investment. The property tax-related incentives are typically long-term in duration and provide significant savings for making qualified capital investment.
 

Need funding
Last fall's Small Business Jobs Act created the State Small Business Credit Initiative and funded it with $1.5 billion to strengthen state programs that support lending to small businesses such as nurseries and garden centers.

Designed to spur up to $15 billion in lending, in July 2011, 17 community banks received $214 million as part of the second wave of funding.

Under the State Small Business Credit Initiative (SSBCI), participating states will use the federal funds for programs to leverage private lending to help finance small businesses such as nurseries that are creditworthy, but are not getting that are not getting the loans they need to expand and create jobs.

The SBA's 7(a) and 504 loan program maximums would bump from $2 million to $5 million and the microloans would increase from $35,000 to $50,000.

Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small businesses to use 504 loans to finance certain mortgages to avoid foreclosure.

The SBA's CDC/504 Loan Program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization. It is ideal for small green industry companies requiring "brick and mortar" financing. Rather than commercial lending institutions, 504 loans are delivered via CDCs (Certified Development Companies) — private, non-profit corporations set up to contribute to the economic development of their communities.
 

Gone but hopefully not forgotten
The Tax Relief Act provided many opportunities designed to help green industry firms reap tax benefits for capital investments. The 2011 tax year may be the optimal time to take advantage of the federal, state and local tax or financing incentives that encourage capital investments.

Under the right capital investment scenario, a savvy business may be able to claim 100 percnt federal bonus depreciation, New Markets Tax Credit, state investment tax credits and municipal property tax abatement on the same capital investment. Growers may also benefit from the soon-to-expire funding opportunities available today.
 

In the past, generous tax breaks for gas-consuming heavy SUVs often raised the ire of Congress. However, last December's Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 actually made tax breaks for these assets even more generous. Although probably unintended, the limited-time 100 percdent "bonus" depreciation allowance includes a new, heavy SUV purchased and used for business. That's right, the entire purchase price can be written off in the placed-in-service year. A grower, garden center or nursery retailer that buys and places in service a new heavy SUV — those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight -- after September 8, 2010 and before January 1, 2012, and uses it 100 perecent for business, may write off its entire cost in the placed-in-service year. There is no specific rule barring this result for heavy SUVs.

Mark Battersby is a freelance writer in Ardmore, Pa. His tax and financial features have appeared in leading business magazines and trade journals for more than 25 years.