Tax Benefits of Modular Construction
Keeping up with the new tax laws may be confusing, but it’s worth a little investigation. The good news for our industry is that tax benefits for building with modular construction are better than ever.
Under a provision enacted this past December, companies who buy modular building systems can take advantage of the updates to IRS Section 179 code. For the 2010 and 2011 tax years, modular offices can be expensed up to $500,000 for purchases not exceeding 2 million dollars. Applicable purchases of $ 500,000 dollars can now be written off during the tax year they are purchased and put to use. In contrast, conventional building methods, or “stick built” construction techniques must be depreciated over the course of 39.5 years.
The tax provisions in the new 2010 tax bill are designed to provide incentive for businesses to get spending, expanding, and hopefully to create more jobs. Modular construction qualifies for one year depreciation thanks to the new tax breaks. Now businesses everywhere can expand and purchase new equipment with fewer expenses to worry about.
What this means is that you can invest in a modular building for your business and recover the costs within a year in tax deductions. That's a great deal. This tax break is only effective until the end of December 2011, when the maximum write-off for modular buildings will be reduced to $125,000. Businesses who want to expand and get a good deal on equipment and modular buildings should buy soon.
Section 179 is based on a company's taxable income, so loss or low income companies might not be able to take advantage of this section; however, they will still be able to take advantage of the bonus depreciation.
This is an informational piece only, and not intended to offer any tax advice. Please consult with qualified professionals concerning your specific situation.
A highly reputable accounting firm Grant Thorton® rendered an opinion of the wall systems with regards to depreciation and its classification. In general, by definition (which has remained consistent over the years), the product is considered equipment and depreciates accordingly. Thus allowing a company to completely write off the expenditure over 5 times faster than typical construction.
How does this advantage affect the cost?
With current tax laws, the bottom line is that conventional construction's initial cost would need to be over 32% less to match the tax advantages of Panel Builts product. The following breakdown illustrates this and lists the assumptions.
• Maximum corporate tax is 39.6%
• Panel Builts product qualifies for 7 year depreciation, yearly write off is 14.3% (1/7 project cost)
• Construction depreciation is 39 years, yearly write off is 2.6% (1/39)
• After seven years Panel Builts building is completely written off, while only 17.9% of conventional is written off.
• Using the above tax (39.6%) to determine a projects true cost, Panel Builts product returns 39.6% in tax savings to the company where conventional returns only 7.6% (17.9% x 39.6%) in the first seven years.
(100% - 39.6%) = 60.4% modular cost = 92.4% conventional cost x
(Y being the cost difference) Y = .604 - Conclusion, Panel Built has a 32% price advantage (1 - .604 = .39.6).
*As a foot note, many situations can cause other rulings to apply, Grant Thorton® recommends companies discuss the matter with their CPA's to determine if their particular situation would qualify for this depreciation