School bus contractors are facing higher
fuel costs, increasing vehicle prices
coupled with forthcoming higher
emission control standards, and
shortages of qualified drivers among many
concerns. At the same time, overall school
budgets are being pinched by reduced revenues
from our challenged economy.
As daunting as these factors appear, proper
tax planning can mitigate some of these
higher operating costs.
With the advent of a recession and the
general decline in business activity, Congress
has passed three pieces of tax legislation
over the past year that provide, among
other things, incentives for businesses. In
many instances, these legislative changes to
the Internal Revenue Code impact tax year
2008 and beyond.
The three tax acts enacted are:
Small Business and Work Opportunity
Tax Act of 2007 (SBWOTA) P.L. 110-28
Economic Stimulus Act of 2008 (ESA)
Emergency Economic Stabilization Act
of 2008 (EESA) P.L. 110-343
The following is a summary of the major
provisions impacting tax year 2008 as related
to school bus contractors, along with specific
Section 179 expense deduction
The election for taxpayers to expense the
cost of certain fixed assets has always been
well received, and provisions already in
place under I.R.C. §179 (Sec. 179) allowed
taxpayers to do so.
SBWOTA increased the maximum amounts
starting with tax year 2007 and indexed these
deductions for inflation so they would continue
to increase. Also, the phase-out threshold
for this deduction was increased.
Under ESA, the amounts were superseded
for 2008 only, by raising the limit of the I.R.C.
§179 to $250,000 with a phase-out threshold
for Sec. 179 property placed in service to
$800,000 (this increased from $128,000 and a
threshold of $510,000). However, in tax year
2009, it is scheduled to revert back to the SBWOTA
Tax planning: 2008 is a key year to maximize
the benefit of immediately writing off
assets rather than depreciating them over several
years. If you purchased less than $800,000
of qualifying assets (buses, trucks, machinery,
office equipment, furniture, computers,
and gasoline storage tanks and pumps), you
are eligible for a first-year deduction of up to
$250,000. (If asset purchases exceed $1,050,000,
Sec. 179 write-offs are not allowed.)
If you purchased $250,000 or less of qualifying
assets, the entire amount is deductible
in 2008. In 2009, the limits revert back to
the SBWOTA rules of a maximum credit of
$133,000. In 2010, the limits revert back to the
pre-2003 levels of $25,000 Sec. 179 expense
with a $200,000 threshold.
Since the ESA change is effective for fiscal
years ending after June 1, 2008, fiscal year
taxpayers get the higher limit of $250,000 until the end of their fiscal year (e.g.,
contractors on a July to June year get
the higher limit on assets in use before
ESA amended I.R.C. § 168 to allow
taxpayers to take an additional first-year
50-percent bonus depreciation of
the adjusted basis of qualifying property
acquired in 2008. This involves
property with a 20-year life or less and
is eligible by definition for the modified accelerated cost recovery system
(MACRS). Eligibility is also available
to off-the-shelf computers, qualified
leasehold improvement property and
water utility property.
In order to utilize this bonus depreciation,
the asset’s original use, acquisition and placement in service must
occur during 2008. The taxpayer must
reduce the adjusted basis for the bonus
depreciation before calculating the
normal depreciation on the reduced
basis. (There has been discussion of a
“Workers, Retirees, and Employer Recovery
Act of 2008” extending the Sec.
179 and bonus depreciation rules for
2008 into 2009, but nothing had been
passed as of press time.)
Tax planning: If the taxpayer has
taken the Sec. 179 deduction and there
is a remaining basis on the property,
the taxpayer can take bonus depreciation
on the remaining basis.
For example, assume the entire
$250,000 of qualifying assets is written
off (Sec. 179) and one bus remains to
be depreciated. The purchased price of
the bus is $70,000. A bonus depreciation
deduction of $35,000 (50 percent)
is allowed along with the normal depreciation
on the remaining basis of
the bus ($70,000 cost less $35,000 bonus
depreciation results in $35,000 remaining
basis). Assuming a five-year life
using MACRS, another 20 percent of
the remaining basis — $7,000 — is taken
as additional depreciation. Thus, a
$70,000 bus results in $42,000 ($35,000
bonus plus $7,000 regular depreciation)
being written off in the first year,
making the after-tax cost of the vehicle
Another scenario with attractive
tax benefits is buying a heavy SUV
(over 6,000 pounds) for your business.
Using Sec. 179 rules, half of the
vehicle can be expensed immediately
or $25,000. The remaining basis of
$25,000 is subject to the 50-percent bonus
depreciation, resulting in another
write-off of $12,500. The remaining
basis of $12,500 is subject to the
MACRS depreciation of 20 percent in
the first year, or $2,500. Thus, $40,000
of the vehicle can be expensed in the
first year of use.
Taxpayers are limited on the amount
of first-year depreciation they can take
for a passenger automobile. Under
I.R.C. §280F(a)(1)(A)(i), it is limited to $3,060. ESA increases this first-year
amount by $8,000 to allow taxpayers
to utilize the provisions of bonus depreciation
as outlined above (maximum
first-year to $11,060; and $11,260
for vans or trucks).
Tax planning: This provision assumes
the automobile is predominantly
used for business. Taxpayers should
take advantage of this 2008 tax savings
provision along with buyer savings the
manufacturers are currently offering.
Tax credits are available for qualified alternative fuel motor vehicles.
Buses can be newly purchased or
converted from an existing diesel/
gas unit and retrofitted for use with
The credit depends on the weight
of the bus and the incremental allowable
cost (the cost of the vehicle over
the suggested retail value of a comparable
diesel bus). Generally, the credit
ranges from 50 to 80 percent and can
offer tax credits of almost $10,000 on a
newly purchased bus.
The credit is part of the general business
credit and may be carried back
one year and forward for 20 years (IRS
form 3800). The bus must be purchased
before Jan. 1, 2011.
EESA also extends a number of existing
alternative energy tax incentives.
Prior law allowed a tax credit for using
alternative fuels (credit depends on the
type of fuel).
Contractors using propane or biodiesel
fuel mixtures could receive a 50-
cent per gallon credit. EESA increased
the biodiesel credit to $1 per gallon to
match the same credit for using agribiodiesel.
EESA also extends the alternative
fuel tax credit three additional months,
to Dec. 31, 2009.
Tax planning: Receiving the credit
requires being the alternative fueler
with respect to the fuel and registered
under §4101. Thus, a contractor must
pump the fuel into the tank of their
buses. Generally, if you are using alternative
fuel and you do not have a refueling
station, the credit is provided to
the person pumping the fuel. If your
transportation arrangement allows for
the school district to purchase fuel and
you pump from their tanks, the credit
goes to the school district.
Before using alternative fuel buses,
make certain you can capture these
credits by installing an alternative fueling
station or having the credits passed
to you from the school district.
Alternative refueling station
Installing an alternative refueling
station after Dec. 31, 2005, to store and
dispense clean-burning fuel into buses
provides a 30-percent tax credit up to
$30,000. EESA extends the alternative
refueling station credit one additional year, to Dec. 31, 2010. The credit is part
of the general business credit and may
be carried back one year and forward
for 20 years.
Tax planning: If you are considering
using alternative fuels, contact the provider of the fuel to get a dispensing
unit installed on your property. This
ensures you get the credit for pumping
each gallon of alternative fuel as well
as the refueling station credit. The refueling
station credit does not apply to
structural components or a building.
Other tax-saving ideas Hiring disadvantaged workers: SBWOTA
renewed the Work Opportunity
Tax Credit (WOTC) through Aug. 31,
2011. Under this program, companies
hiring employees in groups facing economic
challenges, such as
welfare recipients, high-risk
youths and veterans,
can receive tax credit for
a percentage of qualified
wages paid to these employees
for the first two
years of employment.
If you own a commercial
building and improve the
energy efficiency of interior lighting
systems; heating, cooling, ventilation,
and hot water systems; or the building
envelope, an immediate deduction
is available rather than depreciating
the cost over the useful life of the building.
A maximum deduction of $1.80 per
square foot is available. EESA has extended
this Sec. 179D provision for five
additional years to Dec. 31, 2013.
Real estate taxes: If your business is
located in a community where real estate
prices are declining, consider appealing
the real estate assessment on your property
to reduce real estate taxes.
The current economic climate will motivate
businesses to take advantage of the
tax incentives provided by Congress in
recently enacted legislation. Businesses
with purchase equipment needs should
evaluate the tax savings and the respective
time frame to utilize these benefits.
Please consult your tax planning professional
for guidance in these areas.
Bruce A. Leauby is an associate professor at LaSalle
University in Philadelphia. He can be reached atleauby@
lasalle.edu. Jack Zook, an assistant professor at La-
Salle University, can be reached at[email protected].