Construction companies have a lot to keep track of. Between managing projects, ensuring building sites are compliant and running the office side of things, it can be hard to stay up to date on the latest developments related to tax. Especially sales, use and excise tax, which always seems to be changing.
At BerganKDV, we assist many construction organizations with their tax and accounting needs, and one topic that we have helped several of our clients navigate this tax season is the sales tax exemption for rental construction equipment.
In the state of Iowa, the rental of building equipment is exempt from sales and use tax when used in new construction, reconstruction, alteration, expansion or remodeling.
According to the Iowa Contractor’s Guide, the term “building equipment” means any vehicle, machine, tool, implement, or other device used by a contractor in erecting structures for others, or reconstructing, altering, expanding, or remodeling property of others that does not become a physical component part of the property upon which work is performed and is not necessarily consumed in the performance of such work.
Here are some examples of rental equipment that applies to this tax rule:
- Self-propelled building equipment (does not include vehicles subject to registration)
- Self-constructed cranes
- Pile drivers
- Structural concrete forms
- Regular and motorized scaffolding
- Attachments customarily drawn or attached to the above
- Auxiliary attachments that improve the performance, safety, operation, or efficiency of the equipment and replacement parts
- Tools, including hand tools
- Drill presses
- Forms other than structural concrete forms
If you are renting any of the above equipment, to ensure that you are exempt from paying sales and use tax, you need to provide your rental vendor with a Sales/Use/Excise Exemption Certificate. On the certificate, please note it doesn’t list “contractor” under the purchaser categories, so you can simply mark the box for “Other”. In the section “Purchaser is claiming an exemption for the following reason”, again you can indicate “Other” and write in “Iowa Rule 701 219.21 (423). You can find the certificate on the Iowa Department of Revenue’s website.
With the tax rules, there is the potential for a separately formed entity to not pay any sales, use or excise tax for equipment that is purchased for leasing and then rented to a separate entity that uses the equipment exclusively for new construction, reconstruction, alteration, expansion, or remodeling.
For example, you could be a contractor called XYZ Building that specializes in new home construction, and you could legally form a new entity called XYZ Rentals that rents equipment back to XYZ Building at a fair market price with a written lease. In this situation, there would be no sales, use or excise tax on the purchase of the equipment and no sales, use or excise tax on the leasing of the equipment.
To maximize this tax rule, it’s imperative to keep track of documents and equipment transactions between entities. A capitalization policy should also be documented for financial reporting and tax purposes. BerganKDV typically recommends a $2,500 expensing threshold for equipment you plan to capitalize. If repair work on equipment reaches the point of capitalization, the entity that owns the equipment should be the entity that capitalizes the expenditure.
At BerganKDV, our Construction Industry team partners with construction companies to streamline their tax and accounting processes and ensure that they are taking advantage of the tax rules that benefit them. If you are a construction organization in the state of Iowa that has been paying sales and use tax on rented equipment, feel free to reach out and we would be happy to help you with the next steps.
Interesting in learning more about the latest sales and use updates in the construction industry? Check out the recording of our team’s recent tax-focused webinar here.