Tax Implications on Construction vs. Modular Systems

//Tax Implications on Construction vs. Modular Systems

Takasago-Replacement-Image-DSCF4479_BigIt’s April and that means tax time. We, like many businesses, always are looking for ways to minimize our tax burden and improve our company. That’s why this is such an important conversation.

When most businesses begin to need more space, they think of additions or expansions. However, the tax ramifications of permanent construction is generally depreciated over 39 years. Conventional construction, by its nature, becomes a permanent structural addition to a building, and thus it is classified as “real property” with the longer 39-year depreciable life. This draws out any major investment benefit by companies a lot longer than it needs to be.

On the other hand, current tax laws allow very favorable depreciation on all modular offices, portable buildings and mezzanines. These products qualify for a 7-year depreciation period. The reason is that these products can be fully dismantled, relocated, and reassembled. This mobility, under the Modified Accelerated Cost Recovery System (MACRS), allows our products to be classified as “tangible property” with a shorter 7-year depreciable life. This shorter depreciation allows you to realize a greater tax benefit in the short term.

Let’s look at a real-life example:

  • Modular Project Cost: $50,000

  • Eight Year Cash Savings on Purchase**: $17,500

  • (Assuming a 35% tax bracket)

  • Conventional Construction Cost: $50,000

  • Eight Year Cash Savings on Purchase**: $3,590

  • (Assuming a 35% tax bracket) Eight Year Tax Savings**: $13,910

For expenditures that fit within the rules, Section 179 of the United States Internal Revenue Code, allows a taxpayer to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. From mezzanines and modular offices to racks and office furniture the effective cost of our products is significantly less on your bottom line.

An example of this:

  • Project Cost: $25,000

  • Section 179 Deduction: $25,000

  • Total First Year Deduction: $25,000

  • Cash Savings on your Purchase: $8,750

  • (Assuming a 35% tax bracket)

  • Cost of Project after Tax Savings*: $16,250

If you are interested in reducing your tax burden through our modular solutions, call us today at (973) 227-0018 or fill out the More Information form to the left.