BUSINESS: Taxing Decisions

Grant Embree has yet to feel the chill of an impending economic recession.

His company, Eco Landscapes, is headquartered in the North Dallas/Fort Worth area of Flower Mound, Texas, where Embree says the economy is still strong and his landscape business is prospering.
 
“Though I live in the No. 1 county for foreclosures in Texas there’s no sign of slowing growth,” he says. “Housing is still booming. If anything, I’d say, to date, this year my company has nearly doubled last year’s numbers.”
 
And while growth is planned for the remainder of 2008, Embree doesn’t expect any large-scale equipment purchases to take advantage of tax benefits built into the 2008 Economic Stimulus Act. But he’s thankful for the tax breaks, nonetheless, adding a smart business owner always looks to reduce his taxable income. “As a small company, I look for as many ways to keep money in my pocket rather than giving it to Uncle Sam,” Embree says.
 
Rick Pierce agrees, though he plans to take full advantage of the tax breaks. “We’re looking to increase the size of our truck fleet by two vehicles,” says the president of Planting & Irrigation Solutions in Fairhope, Ala. “And I hope to purchase a new zero-turn mower and other maintenance equipment this year.”
 
A straw poll of Lawn & Landscape readers, though, indicated many contractors are unaware of the full extent of the stimulus package. While most knew about the $600 ($1,200 for married couples plus $300 for each qualifying child) tax returns they should be receiving soon in the mail, many were unaware of the additional components intended to stimulate spending and growth.
 
And while they’re meant to jump-start the overall U.S. economy, the recent changes to the tax law, for a limited time, provide attractive spending incentives to contractors and may even have a positive ripple effect on the rest of the green industry.
 
“The incentives have two impacts,” says Bill Rys, tax counsel at the National Federation of Independent Business in Washington D.C. “First, they are a valuable tool because they encourage business owners to make new investments in their businesses through increased deductions – basically putting money back in the pockets of the businesses. In addition, the businesses that sell the equipment will also see the benefit of selling more goods.”

WHAT’S AVAILABLE? The economic stimulus package includes a pair of business-related tax incentives designed to lower a landscape contractor’s cost to invest in new equipment.
 
One provision expands expensing for business owners. An owner, according to the provision, who purchases less than $800,000 in capital assets in 2008 can expense the first $250,000 of that investment. Previously the limit was $128,000.
 
So what does that mean to a landscape contractor? Essentially, if the contractor sees an opportunity to grow or feels a need to upgrade his equipment to remain competitive, in 2008 he can deduct the total cost of a truck, mowers, skid-steer or other equipment up to $250,000. It’s important to note that the equipment must come into service in 2008 to take the deduction.
 
“For a landscape contractor that could be really nice because it substantially reduces his taxable income in 2008,” says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants in Washington.
 
The provision may also include certain leased equipment, Ochsenschlager says, though it depends on the way the lease is structured.
 
“There are some leases where the actual owner of the property gets the deduction from the lease,” Ochsenschlager says. “The IRS takes the position that, in many cases, a lease is a way of financing the acquisition of the property. In many cases, when it’s a finance lease, the small business owner can take the deduction for the property. When it’s a rental lease, then you couldn’t take the deduction.”
 
The other tax provision in the stimulus package that may interest landscape contractors is the 50 percent expensing allowance. This bonus depreciation provision – an increase of 30 percent – is for new tangible property and software with a recovery period of 20 years or less. Most equipment used by a landscape contractor fully depreciates in less than 20 years, Ochsenschlager says, and those that depreciate in excess of 20 years include only very large industrial items.
 
“This provision is not meant for General Motors,” he says. “It’s meant for a small business owner like a landscape contractor.”
 
So how does this benefit the average landscape company? Let’s say a contractor purchases a pair of pick-up trucks and landscape trailers and a pair of zero-turn mowers that total $100,000. He can then apply the first-year bonus depreciation of $50,000 (50 percent) of that purchase, with the remainder depreciating under regular depreciation rules (most likely over five years). “It’s another way a landscape contractor can save money up front,” Ochsenschlager says.
 
Landscape contractors need to make sure that their investments are qualified investments, Rys says, otherwise they cannot take the deduction. “The category of investments is pretty broad,” he says. “It includes most equipment while excluding investments in land and most changes to buildings. There are also some special rules dealing with the purchase of vehicles, especially SUVs and trucks.”
 
Some of the rules governing what can be deducted are complicated and it’s important for a landscape contractor to consult with a qualified tax professional, Ochsenschlager says.
 
“If your business is landscaping then you should be focused on that, not trying to read volumes of the Internal Revenue Code,” Ochsenschlager says. “The laws change all of the time. It’s a good idea to have an accountant in on this from the get-go.”

WHY NOT? Though attractive, the economic stimulus provisions haven’t entirely convinced some landscape contractors that they’re the most prudent tools for growth.
 
Some contractors refuse to spend money for spending’s sake. A landscape contractor must have a profitable need for the new equipment to justify the expense and investment, regardless of the tax incentive, says Doug Austreim, president of Austreim Landscaping in Brookings, S.D. “You can not justify the expenditure unless it has a profitable purpose,” he says.
 
David Katz agrees, adding his company, Elite Landscaping in Wappingers Falls, N.Y., is considering equipment purchases and staff increases, but not because of the stimulus package. Prudence is a solid business practice in a questionable economy, he says. “Even though you have tax incentives you still need to manage the cash flow,” he says. “You need to have the money to spend it. Of course, if I have the money and can take advantage of the tax benefits, then all the better.”
 
Chad Stern, president of Mowing & More in Chevy Chase, Md., says the uncertainty surrounding work force issues, like the H-2B visa program, makes him cautious about plunging his company into growth mode. “I wouldn’t feel too comfortable making $250,000 in capital expenditures when I am unsure I will be able to hire people who are legally permitted to drive the trucks and use the equipment,” he says.
 
There’s nothing wrong with a wait-and-see approach towards this issue, Rys says. “Keep in mind, though, that the incentives expire after Dec. 31, 2008, so you don’t want to wait too long.” LL