CED

April 2013

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Research Business Interest Deduction What you told us: The combined interest expense deduction for 2011 reported by survey respondents was $92 million, an average of $872,000 per company. By contrast, the total interest expense deduction reported by respondents for 2007 was $163.19 million, an average of $1.75 million per company. The total projected interest deduction for all AED members in 2011 was $232.05 million, while the total estimated interest expense deduction in 2007 was $468.53 million. In a separate question, respondents identified protecting the business interest deduction as their top tax priority. What it means: Credit drives the equipment industry and is critical to our members��� ability to keep the doors open for business and to finance their rental fleets ��� and also to their customers��� ability to buy equipment. Business interest tax treatment is on the table as lawmakers hunt for new revenues to make up budget deficits. A strong offense is a strong defense. The equipment industry needs to be aggressive in educating lawmakers about why the business interest deduction is so important to distributors and their customers. Estate Tax What you told us: Forty-four percent of survey respondents said that their company had purchased life insurance for the current owners to protect the company from the federal estate tax. The total expended by survey respondents on estate tax-related life insurance was $11.3 million. The average was $221,100 per company. Similarly, 45 percent reported having hired attorneys and accountants to create estate plans to protect their business from the federal estate tax. The total spent by respondents on estate planning lawyers and accountants over the past three years was $2.83 million, an average of $54,000 per company. We project that AED members annually spend a combined $31.82 million on estate tax-related insurance premiums and that over the past three years our members have spent a combined $6.69 million on estate planning lawyers and accountants. What it means: As AED has documented in study after study, the federal estate tax takes an enormous toll on the capital-intensive, family business-dominated construction equipment industry. Earlier this year, the Taxpayer Relief Act permanently fixed the top estate tax rate at 40 percent and the personal exemption at $5 million, indexed for inflation. Restoring predictability to the estate tax was a good start, but Congress needs to do more. AED maintains that the tax is fundamentally unfair because it disproportionately penalizes family businesses and amounts to double taxation. We continue to believe that it should be repealed in its entirety. However, in the alternative, Congress must come up with a simple way to mitigate the negative impact on family companies, for example, by allowing assets to pass from generation to generation without being taxed and only being taxed at sale. Tax Reform Priorities What you told us: Respondents identified their top priorities for the tax reform debate as protecting the business deductions (especially business interest), cost recovery issues (e.g., preventing Congress from tampering with depreciation periods for construction equipment, Sec. 179 small business expensing, and the depreciation bonus), and identifying new user fees to support federal surface transportation investment. What it means: AED will focus its tax-related advocacy resources on: n Ensuring that tax reform includes improvements to the tax code for pass-through entities, not just C-corporations n Promoting capital investment by protecting the business interest deduction and Sec. 179 expensing n Preventing Congress from extending cost recovery periods for construction equipment, repealing LIFO, or changing LKE rules n Working with the IRS to ensure consistent tax treatment of dealer rental fleets and the permissibility of LKE n Further reforming the estate tax to protect family business assets from being taxed upon the owner���s death n Extending the depreciation bonus for one additional year (if economic conditions warrant) n Creating new user fee revenue streams to support federal surface transportation infrastructure investment Methodology and Respondent Profile The survey was conducted in November and December 2012. Survey forms were mailed to all U.S. AED dealer members, who were given the option of returning the survey to the association���s Government Affairs Office by e-mail, fax, or regular mail. Each survey had a unique identifier to prevent multiple responses. Ultimately, 115 distributors responded to the survey (representing 28 percent of the association���s dealer membership). We made the membership-wide projections by taking the reported percentage of members in a given dues category who said they behaved in a certain way (e.g., used LIFO) and multiplying that by the total number of AED members in that dues category. We then multiplied that figure by the average answer (e.g., average LIFO reserve) for the relevant dues category and added together the results for all dues categories. Thanks to all our members who took the time to fill out the survey. We hope you will agree that the results we generated were worth the time and effort. n Christian A. Klein is AED vice president of Government Affairs & Washington counsel. He can be reached at caklein@aednet.org, (703) 739-9513. April 2013 | Construction Equipment Distribution | www.cedmag.com | 25 20_Tax_Feature_KP.indd 25 3/25/13 12:04 PM

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