Have You Revisited Your Buy-Sell Agreement Lately?

As the business owner’s average age continues to increase given the demographics of our population, there are a number of issues that may not have been perceived as important a few years ago that gain increasing attention as time marches on.  The truth is that these issues (e.g. buy sell-agreements, business continuity plans, etc.) have always been important.  There are a number of ways one can exit his/her business.  Many of those exit plans are voluntary and planned while some are not.  These agreements are often times overlooked as there is no sense of immediate need/urgency, etc.  They also generally deal with less than pleasant scenarios that people prefer not to think about.  The reality is that if you want to take care of your spouse and children, you really need to think about how your business is going to produce a liquidity event, in a timely, efficient and fair (think valuation and terms) manner so your family can be well taken care of.  It can also be helpful to you as a shareholder if for some reason you find yourself, or your partner, having to divest from the business for whatever reason.

In basic terms, buy-sell agreements deal with situations whereby a business owner leaves the business through death, incapacitation or some other unexpected set of circumstances.  These agreements are also important in that if your partner is the one who is unexpectedly unable to continue in the business, the buy-sell agreement is the vehicle which will preclude his/her spouse from becoming your business partner.  This last item alone can be very motivational for business owners to address this issue.  

Some of the key terms addressed via a buy-sell agreement include who may buy the business interest, the events that trigger the agreement and the price to be paid for the business interest.  All of these are very important elements and must be addressed thoroughly and with professionals who are expert in preparing such agreements.  There are a few major, critical considerations which also must be addressed when structuring buy-sell agreements; 1) valuation criteria and 2) properly funding the buy-sell agreement.

The valuing of a business, or a share in a business, is an undertaking that can produce varied results.  I’ve said many times over the years you can have one valuation expert arrive at different valuations for different purposes (there are a number of reasons a company may need to obtain a valuation) at the same point in time.  You can also have different valuation firms arrive at very different results all valuing the business for the same purpose at the same time.  The best way to mitigate the potential for an unexpected and/or unfair result is to hire valuation experts familiar with your industry and business.  One size does not fit all when it comes to valuation and the selection of the right valuation firm is critical.  Valuation is contingent on many factors including methodologies, styles and perspectives, who the valuation firm is hired by (buyer or seller), etc.  Within the context of a buy-sell agreement, valuation is further challenging in that the principals are not necessarily looking for a value today, rather the goal is to ascribe a value to a business, or share of a business, at some unknown point in the future. 

The best way to handle the valuation issue in a buy-sell agreement is to have a valuation performed in the first year and then get annual, less expensive updates to that valuation in subsequent years.  Using this process, the many variables associated with properly valuing a business can be addressed given the set of conditions present at that time.  It is impossible to build a formula that will successfully process all of the variables that can change in the future.  That being said, in addition to building in a valuation requirement, it makes sense to insert a formulaic approach into your buy-sell agreement if for some reason a valuation wasn’t performed at the scheduled time(s) as a backup safety valve.  A dynamic formula is better than none at all and can be critical in the absence of a valuation being performed.  Arriving at a fair value for the business is essential to ensuring you and your family’s interests are protected.

Another important consideration in structuring buy-sell agreements is the funding of the liquidation event.  Depending on the particular set of circumstances, there are a variety of ways to fund buy-sell agreements so that the business is not disrupted.  Also, insurance can be an effective tool serving as value preservation in the event that the loss of a key individual adversely affects the valuation of the business.  Generally speaking, there are a number of insurance products used to fund the buy-sell agreements so that the business has the liquidity it needs to pay out the proper value of the business to the appropriate parties.  

A buy-sell agreement that isn’t properly funded is similar in many ways to establishing a living trust without funding it (i.e. converting title of assets into the trust, etc.)  It ends up causing additional heartache and stress and the good intentions of putting such structures in place are nullified by the failure to complete the job and address all the issues up front.  If you do not have a buy-sell agreement in place, or if you are unsure if it’s properly funded, you should reach out to your trusted advisor team and address it immediately.  If your agreement hasn’t been reviewed in a number of years you should revisit it to ensure it will achieve your objectives so you and your family are protected in the event the agreement is triggered.

If you would like assistance in reviewing the terms of your buy-sell agreement and/or developing the funding model, please do not hesitate to contact me.

California Competes Tax Credit

There are many programs in the state of California designed to foster and incentivize business growth.  The California Competes Tax Credit is an income tax credit available to statewide businesses in all industries looking to invest in California. This is a dollar for dollar tax credit against income tax due in California which can also be used against the Alternative Minimum Tax (AMT).

This credit is limited and will be evaluated and awarded based on the respective company's situation. The investment agreements are negotiated by GO-Biz and approved by the California Competes Tax Credit Committee, consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, and one appointee each by the Speaker of the Assembly and Senate Committee on Rules. The program started January 1, 2014, and is scheduled to sunset on January 1, 2025.

It is important to note that no more than 20 percent of the aggregate amount of the credit will be available to any one taxpayer and 25 percent will be reserved for small businesses. This process is competitive, so submitting information timely is essential in obtaining these potential credits.

The factors determining how much credit a taxpayer will be allocated in a fiscal year include:

• The number of jobs created or retained in California;
• Compensation levels paid to employees;
• Investment amounts to make in the state;
• Levels of unemployment or poverty in the area where the business is located;
• Incentives available to the taxpayer in this state and in other states;
• Duration of the project for which the taxpayer commits to remaining in California;
• Overall economic impact of the taxpayer's business, including opportunity for future growth in the state; and
• The extent to which the anticipated benefits to the state exceed the projected benefit to the taxpayer from the credit.

The program will accept applications during the following dates:

• September 29, 2014 through October 27, 2014 ($45 million available)
• January 5, 2015 through February 2, 2015 ($75 million available)
• March 9, 2015 through April 6, 2015 ($31.1 million available plus any unallocated amounts from the previous application periods)

We can help identify, at no cost, if a business is eligible for this lucrative tax savings opportunity.  As always, if you have any questions please contact me.

Architectural Billings Index

The July 2014 Architectural Billings Index results were published a few weeks ago.  I like to keep an eye on this index, which is a leading indicator for construction activity (about 9 – 12 months ahead of related construction activity).  For more background on this index, click here…

On a national basis, the index score was 55.8, a sharp increase from previous months and a strong rebound from earlier in the year when harsh winter weather slowed things down considerably.  In a nutshell, any number 50.0+ indicates increased architectural billings and foretells increased construction activity.  The regional data shows activity in a tight positive range across the U.S. as follows: West (53.5) South (55.1) Northeast (55.5) and the Midwest (54.1).

These regional numbers can be compared against the table below which shows the March numbers for 2014 and 2013:

	West	South	Northeast	Midwest	National
2014	50.7	52.8	46.8	46.6	48.8
2013	51.9	53.6	54.6	53.9	51.9

Earlier this year I wrote the following after the March 2014 numbers were posted: “The numbers, year over year at March, dropped for all regions but far more sharply in the colder weather climates.  If weather was a factor, we should see these numbers rebound in the Spring/Summer months.  The numbers suggest, in our region here in the West, that things are stable and growth is moderate.  The West region numbers in 2012 and 2011 were 46.6 and 47.7 respectively, so things have certainly improved these last few years.  Given this is a leading indicator, expect more of the same over the next year in terms of construction activity, that is modest growth.”

These recent ABI numbers are certainly encouraging.  Many of us who work in this industry can see the improvement in our marketplace.  These numbers bode well for the near and intermediate term of the building industry in the U.S. and out here in the West.

Winning Federal Government Contracts - Patience, Persistence and Strategies to Grow Your Business

by Sarah Weaver, President of STRATEGIC | Creations

The natural progression for construction companies looking to do business with the government is to grow their subcontracting work into prime contracts. The step up to prime time can be done; however, in this competitive and compliance-focused industry, procurement is gained through tenacity, thoroughness and patience (the “stick-to-it-ness”). I have witnessed the downfall of far too many companies that were impatient and expected “one government meeting” to result in a contract. Or their expectations are not aligned with reality, as in, “I have my 8(a) certification, where is my work?” Success can be yours if you’re willing to plan the work and work the plan — let’s roll up our sleeves and get started!

1. Win your first project as a prime contractor (0-2 Years)

So you’re knocking on the door of a federal government agency, hoping to score a prime contract —only to be turned away because you lack the exact prerequisite you are looking to attain — federal prime contract experience. How do you get past this Catch 22? 

In a nutshell, stay persistent, be patient and be prepared for an initial investment. An American Express survey of 1,500 entrepreneurs who were government contractors or actively pursuing a contract found that most were turned down the first two years before finally procuring their first project award. That takes a lot of staying power, as in, “I will bet turned down, but keep trying.” It also takes a bit of financial investment. The same survey found that, in 2010, small business contractors reported investing $103,827 over the course of a year in the bidding process for federal contracts, up from $86,124 reported the previous year. This investment surely includes persistent bidding, presentations and business development efforts to obtain that first contract.

So what is that $100,000-plus a year being spent on? More than likely, your first prime contract is going to come from a sole-source award or a low-price bid because you’re not-yet able to compete based on experience. (Remember, you don’t have experience yet!) Your job at this point is to hone-in on how to best utilize those dollars. 

One way to position yourself for a sole-source award is having expertise in a single key scope of work. (Emphasis on “key scope” — installing door hardware, for example, will not get you to the required minimum of 15% self-performance on typical projects unless the entire project is in fact installing door hardware). As with any industry, you need to bring something to the table, and make sure what you offer is a solution to your customer’s needs. For instance, you wouldn’t market Photovoltaic (PV) installation in Seattle, with its 200-plus overcast days, verses in sunny Yuma, Arizona.

It is also vital to be in front of all your government clients with your marketing materials and capability statements, and these need to be backed up by superb or outstanding performance ratings. Essentially, this is your background check. (You wouldn’t hire an employee without verifying their credentials, and neither will the government.) To that end, do an honest assessment of what your company realistically can and can’t do; above all, know your strengths and capabilities. You may sound good on paper, but your actual past performance speaks for itself. The government sees right through unsubstantiated and vague statements — a “We do everything” blanket statement will not get you far in a one-on-one capabilities briefing. A better strategy to follow in your capabilities briefing is to highlight what you are realistically capable of doing, how you will pull together all of the other necessary resources, and align that with what your customer is looking for.

The government is not looking to contract with construction managers; they want people who can perform major aspects of work. You should already have personnel in place or lined up for the work you are chasing. Communicate your staffing plan to your potential customer. Get a clear grasp of how you can meet your client’s needs, and have the solutions ready before going to in-person meetings.

Remember, each customer and each federal installation is different, so do your homework before any one-on-one meeting!

Also keep in mind that there’s no shame in playing a supporting role. Most actors have supporting roles before landing the big part; the same goes with contracting. If you’re only getting subcontracting work, keep increasing the size of the project you subcontract on so the government can see your growing responsibilities and capabilities. Get savvy on government rules, regulations and lingo. Understand the funding process, prime contracting responsibilities, how the NAICS codes and size standards work, as well as teaming regulations and allowances, and keep your certifications current. Whenever possible, go straight to the source. Understand who within your customer’s agency is responsible for allocating funds and selecting contractors. An old colleague of mine had it right – he never stopped knocking on the door until he was in front of the “decision makers.” Be that resilient.

2. Make your experience work for you (2-4 Years)

Winning your first government prime contract can be a milestone for your company; but you still have a lot of work to do. In many ways, you are still in the audition process; the government is testing you to see how well you manage government projects. Do whatever you can to avoid an adverse past performance rating. The less experience you have, the more crucial it is to have overall favorable past ratings. One poor rating out five projects, for example, represents 25% of your work, whereas one negative past performance rating out of 50 projects reflects only 2% of your work.

Stay active in cultivating your relationships while onsite and continue to knock on doors as you do when you have no prime contract experience. Define what your mix of project types will look like in terms of size, scope and building types and begin to strategize your portfolio on projects that will take you to the next level.

This is also the time to really invest in your marketing and estimating. The toughest proposals to write are the ones where the Company almost qualifies or barely qualifies. This makes it difficult to differentiate from the competition and almost always risks elimination from competition before your price can even make it through the review process.

3. Know how to expand and grow (4+ Years)

Deciding to expand your business means it’s time to get strategic. Here are some recommendations:

§  Bidding process. Formalize your bid/no-bid process to ensure you are only pursuing financially viable projects as well as those that add to your strategic project portfolio.

§  Teaming and joint ventures. Be selective in your teaming. My personal preference is to pursue projects as an informal “team” or traditional prime/sub relationship versus as a joint venture. This method allows for more control and less risk. There are instances where joint ventures may be necessary to qualify, but I highly recommend this option only when it’s absolutely necessary. Regardless of the approach used, utilize teaming and joint ventures to elevate your experience, in project size and/or location.

§  Relationships with your current customers. Each new customer and location requires an initial investment. Continue to cultivate your current relationships. It is easier and cheaper to work in the same location (less mobilization costs, personnel remain happy by not having to move around or relocate, the customer’s unique processes are likely already understood, so there is less of a learning curve in how to please the client).

§  Past Performance. Again, I cannot emphasize this enough - get favorable past performance ratings. These do matter and are often the highest-rated evaluation factor in a proposal.

§  Define your strategic project portfolio. Just like when you are starting your company, growing your business can be somewhat of a Catch 22. You need the exact experience of the work you are trying to chase. Defining the project wins that will take you to the next level and grow your business should start years in advance. Do not be afraid to continue to adjust this plan as the market and/or your company direction change. Go after your strategic portfolio projects with diligence, and make sure you approach with a formal capture planning process.

One more key piece of advice as you take this federal contracting journey is to not grow beyond your capabilities for the sake of growing. Stay within your means, and be patient. Success in any industry is not overnight – and federal contracting is no different. Follow a realistic plan and don’t haphazardly bid. Financial planning aligned with market analysis is so critical to your success – so spend time on these planning processes as you develop and grow your business.

Click on the graphic below the byline for a visual entitled "The Natural Federal Contracting Progression".

If you would like more information on developing or growing your federal contracting business, don’t hesitate to contact me at sarah@strategiccreations.com.

Public Agencies Seek to Avoid SB 293, AB 1705 (Williams) to the Rescue?

A few years ago, I wrote about SB293, Retention Cap on Public Projects (capping retention at 5%).  This bill was passed, however it seems that an exemption within the law exists providing for a higher retention amount to be withheld if the project was deemed “substantially complex”.   The problem that has arisen is that agencies are deeming many projects “substantially complex” even though the projects may be of a more routine and ordinary nature.  The current law does not require the agency to provide proof or substantiation as to why they deem the project “substantially complex” and this has seemingly led to abuse to avoid the 5% cap on retention.  AB 1705 (Williams) seeks to change that and require public entities to explain why they deem a project to be “substantially complex” and include those reasons in the bid documents.

An analysis of AB 1705 can be found here

The following is from the American Subcontractors Association and provides more detail:

AB 1705 requires the agencies to explain what makes a project "SC" and to also notify bidders that in so doing, the 5% cap is removed and more money may be retained. ASAC is very pleased to have CalSMACNA and NECA as co-sponsors to the bill which is supported by several other subcontractor organizations.

            AB 2471 deals with change order payments and just passed its first hearing where ASAC testified in support; it now goes to the Appropriations Committee for a hearing. It requires state and local public entities to promptly issue change orders when extra work is required of the contractor or subcontractor.

            The bill says if a public entity fails to issue a change order within 60 days the original contractor may bill for this work that has already been performed, and the public entity shall be liable for that work. And, interest from the time the amount was due would accrue at 10%, however that rate might be reduced to the current prevailing rate in an upcoming amendment to the bill. Numerous trades support the bill while numerous public entities oppose it citing difficulties in getting paperwork and payments processed in such a short time period.

Lastly, the CA State License Board (CSLB) is proposing these changes in law:

1.  Limit  advertisements placed by unlicensed contractors.  The law currently requires that a person declare in their advertisement that "he or she is not licensed."  CSLB is proposing that unlicensed contractors only be allowed to advertise for work under $500.

2.  Currently, law mandates CSLB to "initiate disciplinary action against the licensee within 30 days of notification" by the Division of Labor Standards Enforcement (DLSE).  The proposed amendment:  (A) removes the mandate in order to give CSLB the flexibility to pursue only those cases where the misconduct is egregious and/or the risk to public harm is great, and

(B) removes the Section's unachievable requirement that disciplinary action be initiated "within 30 days of notification."  Factors outside of CSLB's control make compliance with this deadline impossible, even under the best of circumstances.

Architectural Billings Index

The March 2014 Architectural Billings Index results were published last week.  I’ve been regularly tracking this index, which is a leading indicator for construction activity (about 9 – 12 months ahead of related construction activity), for a few years now.  For more background on this index, click here…

On a national basis, the index score was 48.8, a signicant drop from the month before (50.7).  In a nutshell, any number 50.0+ indicates increased architectural billings and foretells increased construction activity.  Many pundits suggest the unusually harsh winter is the reason for the drop in the index.  The regional data suggests this may be true as in the warmer climates of the West (50.7) and South (52.8) the index was above 50.0.  The Northeast (46.8) and the Midwest (46.6) was where the index was weakest.

These regional numbers were all stronger 12 months ago.  The table below shows the March numbers for 2014 and 2013:

	West	South	Northeast	Midwest	National
2014	50.7	52.8	46.8	46.6	48.8
2013	51.9	53.6	54.6	53.9	51.9

The numbers, year over year at March, dropped for all regions but far more sharply in the colder weather climates.  If weather was a factor, we should see these numbers rebound in the Spring/Summer months.  The numbers suggest, in our region here in the West, that things are stable and growth is moderate.  The West region numbers in 2012 and 2011 were 46.6 and 47.7 respectively, so things have certainly improved these last few years.  Given this is a leading indicator, expect more of the same over the next year in terms of construction activity, that is modest growth.

Businesses in the last few years have learned to be more efficient, to do more with less.  That is always a good model, in good times or bad.  Let’s hope that more jobs, with healthier margins, go out to bid and that you can be poised to take advantage of those opportunities when they arise.

California Employee Training Funding Program

Every year, the state of California approves applications totaling tens of millions of dollars which are awarded to businesses to help offset the cost of training employees.  The areas of training covered are broad, as it says in the YouTube video below basically anything that helps the employees do their jobs better is covered by this program.

Recently one of my clients had their application approved and was awarded $50,000 to help offset the cost of their employee training.  They used a consultant to help them with the application process through approval as well as the administration and record keeping required to be in compliance with the state’s program.

The program is funded by a portion of the payroll taxes everyone pays in to the system.  I don’t believe the program is marketed widely enough and therefore not everyone is aware of it.  If my contractor was able to get their application approved, chances are good for many other contractors to benefit as well from this program.

If you have any questions, as always send me an email and I’ll do my best to help.

ITR Economics - February 2014 Update

In January 2012, I attended an economic forecast.  I’m sure many of you have attended these types of events over the years and they are generally interesting sessions.  This particular event featured Brian Beaulieu, CEO of ITR Economics and this forecast seemed different than many of the others I had attended.  The first notable difference was the time horizon discussed.  Most of the time these forecasts seem to focus on the next year, reflecting on recent economic data (at least during the presentation).  Mr. Beaulieu, an excellent public speaker by the way, presented decades worth of data which served, in part, as the basis for his predictions over the next few decades.  He did also speak back in 2012 about his outlook for the next 5 years and suggested that meaningful growth would occur in 2015 – 2017 after a few years of weak/modest growth.  He even stated that if one was thinking of selling a business in the coming years, 2017 would be a fine year to do so.  He went on to say that in the late 2020’s we could see another Great Depression scenario develop.  Time will tell how good Mr. Beaulieu’s crystal ball is.

That presentation, over two years ago, made an impression on me.  ITR publishes monthly outlooks and I thought that sharing the February 2014 report (click this link) might be worthwhile for you to review.  There is also a Steel Futures Report as well which might be of interest.  Let’s hope Mr. Beaulieu is at least correct with his prediction of strength in the next few years!

2013 Tax Depreciation Limits

I thought it might be nice to publish a summary of the 2013 tax depreciation limits for accounting and finance personnel to be able to reference.

The 2013 tax depreciation limits for Section 179 and bonus depreciation have not changed from 2012.  The American Taxpayer Relief Act of 2012 extended the Section 179 amounts for the 2012 and 2013 tax year.  The 50% bonus depreciation was also extended to the 2013 calendar year.

FEDERAL TAX

1.    Section 179 for 2013 tax year (see below) - Maximum Sec. 179 deduction $500,000.  Investment limit $2,000,000.  (If more than $2M of fixed assets additions of qualifying Sec. 179 assets, the Sec. 179 deduction phases out dollar-for-dollar, e.g., if there is $2,000,001 in additions, the Sec. 179 is reduced to $499,999 – Sec. 179 is completely phased out when total additions exceed $2.5M).  Most common non-qualifying Sec. 179 assets are Leasehold Improvements (with exceptions).

2.    50% Additional First Year Bonus Depreciation – Asset must be new.  The bonus depreciation is 50% for the 2013 calendar year.  (For example, if you have a 6/30/14 FYE client, 50% bonus depreciation will apply for 7/1/13 – 12/31/13, and as of now, there is no bonus depreciation for 1/1/14 – 6/30/14.  Congress has yet to extend bonus depreciation to the 2014 calendar year.)

CALIFORNIA – California never conforms to federal.

1.    Section 179 – Maximum Sec. 179 deduction $25,000.  Investment limit $200,000.  (Same dollar-for-dollar phase out applies – at $225k new additions, Sec. 179 is completely phased out).

2.    No bonus depreciation allowed.

TAX YEARS

The basic rule for tax years – it is determined by when the fiscal year starts.

The 2013 tax year for Section 179 is applicable for 12/31/13, 1/31/14, 2/28/14, 3/31/14, 4/30/14, 5/31/14, 6/30/14, 7/31/14, 8/31/14, 9/30/14, 10/31/14, and 11/30/14 clients.

COMMON ASSET LIVES (BNA)

1.    3 year SL – off-the-shelf software

2.    5 year MC200 – cars & trucks (see note below for limitations), computers, machinery and equipment

3.    7 year MC200 – furniture, phones

4.    15 year MC150 – land improvements (parking lot, fencing, sidewalks)

5.    27.5 year SL – Residential Real Property

6.    39 year SL – Commercial Real Property (including leasehold improvements that are structural and affixed) – certain LHI can utilize a shorter 15-year life for federal if certain criteria are met.

NOTE ON CARS & TRUCKS (SEE ATTACHMENT)

1.    Most cars and trucks are limited to the amount of depreciation (including Sec. 179 and bonus depreciation) you can take each year.  The code for listed property in BNA is “AL.”  For 2013, autos are limited to $3,160 depreciation in the first year.  If bonus depreciation is taken (auto needs to be new), the first year depreciation limit is increased to $11,160.

2.    For trucks having gross vehicle weight rating >6,000 lbs. and bed length >6 feet – can take Sec. 179 for entire cost.

3.    For (a) SUVs >6,000 lbs., (b) vans >6,000 lbs., and (c) trucks >6,000 lbs. with bed length < 6 feet – Sec. 179 is limited to $25,000.

SECTION 179 LIMIT & MID-QUARTER RULES

If Sec. 179 is being limited, and you are trying to figure out which assets to apply the Sec. 179 and which assets to not, the basic steps to take are:

1.    First, choose all the assets with the longer class life (e.g., choose the 7-year asset vs. 5-year).

2.    Second, choose the asset closer to year end (e.g., choose the asset purchased on 12/31 vs. the asset purchased on 1/1).

2014 TAX YEAR

As of today (1/12/14), Congress has not passed extensions of the §179 amounts or bonus depreciation.  This means that as of now, §179 deduction dropped back to $25,000 with a $200,000 investment limit.  Also, there is no more bonus depreciation.  We will keep you updated on the changes.I thought it might be nice to publish a summary of the 2013 tax depreciation limits for accounting and finance personnel to be able to reference.  If these limits don't particularly excite you, please forward to those tasked with knowing such things.

The 2013 tax depreciation limits for Section 179 and bonus depreciation have not changed from 2012.  The American Taxpayer Relief Act of 2012 extended the Section 179 amounts for the 2012 and 2013 tax year.  The 50% bonus depreciation was also extended to the 2013 calendar year.

FEDERAL TAX

1.    Section 179 for 2013 tax year (see below) - Maximum Sec. 179 deduction $500,000.  Investment limit $2,000,000.  (If more than $2M of fixed assets additions of qualifying Sec. 179 assets, the Sec. 179 deduction phases out dollar-for-dollar, e.g., if there is $2,000,001 in additions, the Sec. 179 is reduced to $499,999 – Sec. 179 is completely phased out when total additions exceed $2.5M).  Most common non-qualifying Sec. 179 assets are Leasehold Improvements (with exceptions).

2.    50% Additional First Year Bonus Depreciation – Asset must be new.  The bonus depreciation is 50% for the 2013 calendar year.  (For example, if you have a 6/30/14 FYE client, 50% bonus depreciation will apply for 7/1/13 – 12/31/13, and as of now, there is no bonus depreciation for 1/1/14 – 6/30/14.  Congress has yet to extend bonus depreciation to the 2014 calendar year.)

CALIFORNIA – California never conforms to federal.

1.    Section 179 – Maximum Sec. 179 deduction $25,000.  Investment limit $200,000.  (Same dollar-for-dollar phase out applies – at $225k new additions, Sec. 179 is completely phased out).

2.    No bonus depreciation allowed.

TAX YEARS

The basic rule for tax years – it is determined by when the fiscal year starts.

The 2013 tax year for Section 179 is applicable for 12/31/13, 1/31/14, 2/28/14, 3/31/14, 4/30/14, 5/31/14, 6/30/14, 7/31/14, 8/31/14, 9/30/14, 10/31/14, and 11/30/14 clients.

COMMON ASSET LIVES

1.    3 year SL – off-the-shelf software

2.    5 year MC200 – cars & trucks (see note below for limitations), computers, machinery and equipment

3.    7 year MC200 – furniture, phones

4.    15 year MC150 – land improvements (parking lot, fencing, sidewalks)

5.    27.5 year SL – Residential Real Property

6.    39 year SL – Commercial Real Property (including leasehold improvements that are structural and affixed) – certain LHI can utilize a shorter 15-year life for federal if certain criteria are met.

NOTE ON CARS & TRUCKS

1.    Most cars and trucks are limited to the amount of depreciation (including Sec. 179 and bonus depreciation) you can take each year.  For 2013, autos are limited to $3,160 depreciation in the first year.  If bonus depreciation is taken (auto needs to be new), the first year depreciation limit is increased to $11,160.

2.    For trucks having gross vehicle weight rating >6,000 lbs. and bed length >6 feet – can take Sec. 179 for entire cost.

3.    For (a) SUVs >6,000 lbs., (b) vans >6,000 lbs., and (c) trucks >6,000 lbs. with bed length < 6 feet – Sec. 179 is limited to $25,000.

SECTION 179 LIMIT & MID-QUARTER RULES

If Sec. 179 is being limited, and you are trying to figure out which assets to apply the Sec. 179 and which assets to not, the basic steps to take are:

1.    First, choose all the assets with the longer class life (e.g., choose the 7-year asset vs. 5-year).

2.    Second, choose the asset closer to year end (e.g., choose the asset purchased on 12/31 vs. the asset purchased on 1/1).

2014 TAX YEAR

As of today, Congress has not passed extensions of the §179 amounts or bonus depreciation.  This means that as of now, §179 deduction dropped back to $25,000 with a $200,000 investment limit.  Also, there is no more bonus depreciation.