The Coronavirus Aid, Relief, and Economic Security (CARES) Act that Congress approved in March 2020 allows businesses to use tax write-offs for equipment and building improvements. The types of equipment eligible for the incentive include many solutions that Power Equipment Manufacturers (PEM) assemble and deliver to end customers.
And that means both you, the power equipment manufacturer (PEM), and your customers can take advantage of the law’s provisions. Specifically, the CARES Act allows leaseholders and owners to write off improvements made to the interior of non-residential buildings as capital expenses. This “accelerated depreciation” means your customers can deduct 100% of expenses that fit the definition of “Qualified Improvement Property” (QIP) in the first taxable year.
The savings generated by the CARES Act are significant. Consider an example in which a company spends $1 million on improvements that include equipment and installation. Pre-CARES, the first year’s tax deduction for depreciation would be just under $26,000, but now the business can deduct the full amount. This results in a first-year total project cost of $790,000 and tax savings of $210,000.
Thanks to accelerated depreciation, a company can retain more of its capital, which opens opportunities to make bigger investments in capital improvements. For you, as a supplier, it translates to a potential increase in sales because customers have more money to spend on equipment.
It is important to keep in mind that improvements do not qualify if they are part of a building expansion or related to elevators, escalators, and the internal structural framework of a building. For improvements that qualify, depending on the type, size, and scope of the project, end customers stand to realize substantial savings through CARES. To qualify for 100% depreciation, the equipment must be on site operating, or ready to operate, by the end of the qualifying tax year.
The beauty of tax incentives is they do not require a complicated, time-consuming process to acquire capital, which is typically the case with federal grant programs. So long as the purchase qualifies as QIP, a business can write it off. If you are working on a project with a customer and are not sure whether it qualifies, we at Schneider Electric can help you.
Our account managers can answer questions about CARES eligibility or steer you in the right direction for expert advice. Something to remember: Your internal tax department likely has all the information you need regarding this law because accountants must keep up with tax laws so they can file returns properly.
It is possible some customers have already asked you about CARES. If not, tell them about it. Some may be aware of the tax incentives and ask you whether their project qualifies, but others may need direction. Bringing them up to speed on the CARES Act may lead to additional sales to customers who suddenly realize they have extra money to spend. Last year, we noticed that many customers did just that after learning about CARES.
For some customers, in addition to freeing up more capital for improvements, the CARES Act helps keep people on the job – working on a project that otherwise may not have started.
The CARES Act will remain in place until superseded by another piece of legislation. The 100% bonus depreciation is available through 2022, after which the percentage will decrease by 20% yearly through 2026. This gives PEMs plenty of time to work with customers on projects that qualify for the tax incentive. To learn more about the CARES Act, please review the materials listed below.