The Wall Street Journal
By: Sarah Needleman
September 7, 2010
A proposed new tax break on equipment expenses for businesses of all sizes may have little impact on small companies.
President Obama is expected to lay out a proposal on Wednesday that would allow companies to write off 100% of any amount they spend on qualifying equipment in 2010 and 2011. But already, small businesses that spend less than $800,000 a year on certain equipment can write off up to $250,000 according to an existing tax ruling, known as Section 179 expensing. As a result, small businesses would have to spend more than $250,000 on equipment this year or next to see an additional tax boost.
"You don't see a lot of small businesses making that type of investment," says Maureen McGetrick, a partner in New York with BDO Seidman LLP, a national tax advisory firm. For example, she says the average small retailer or consulting firm simply doesn't need to spend more than $250,000 on equipment in any given year.
In most cases, small businesses will only buy new equipment to replace badly worn out machinery or expand their enterprises. But because of the sour economy, few small companies have enough cash on hand to do either right now, even if they'll be able to write off their investments in just a few months, says Bill Rys, tax counsel for the National Federation of Independent Business, a Washington, D.C., trade group. "They don't have customers coming through the door. They don't have contracts to fill," he says.
Optimation Technology Inc., an industrial-services company with 350 employees and revenues of $32 million in 2009, has cut back on its annual investment in equipment in recent years, says Bill Pollock, founder and chief executive. This year, the Rochester, N.Y. , business will spend about $800,000 on new computers, fabrication equipment and trucks, down from more than $1 million in 2007, he says. "In economic times like this you try to delay any spending...because it helps the cash flow," he says. "The tax break is good, but you have to have money to spend money."
To be sure, the proposed tax break could encourage others small businesses to hurry up and buy equipment since it's temporary, says Robert Litan, a vice president at the Ewing Marion Kauffman Foundation, a Kansas City, Mo., nonprofit devoted to entrepreneurship. "They got to use it or lose," he says. For a business that's been wavering about making an investment, "this could be the tipping point," he says.
Small manufacturers in particular may benefit given that many rely on industrial-size machinery to function. In 2009, small and midsize manufacturers invested an average of $1.4 million in factory equipment, down from $2.3 million in 2008, according to a survey of the National Association of Manufacturers, a Washington, D.C., trade group with 11,000 members.
But Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers, warns that other new legislation that the president has proposed could thwart any relief that the equipment write-off option may provide to small companies. "Potential tax increases on businesses could neutralize the benefits of the provisions," she says.
Tax increases down the road could also impact the return on a business's investment in equipment today, adds Bob Scharin, a senior tax analyst for Thomson Reuters in New York. "The proposal would allow them to deduct more in the year of purchase rather than recovering the cost through depreciation deductions spread over several years," he says. "If tax rates go up in the future, a business could be better off having deductions delayed until those later years rather than deducting it all now when tax rates are lower."