The legislative flurry in Washington, D.C., at the end of last year brought good news for businesses: generous tax cuts and depreciation schedules for technology and equipment purchases. Setting aside partisan differences, lawmakers on Capitol Hill took actions to spur economic growth. SMBs in particular can certainly use the help that these latest incentives offer.
The tax breaks came in the form of two separate bills signed into law by President Obama. The first tax incentive, which lawmakers included in a small-business jobs package, raises the government’s Section 179 deduction from $250,000 to $500,000 for the 2010 and 2011 tax years. It also includes a 50 percent bonus depreciation for the 2010 tax year.
The second Hill action offers a 100 percent bonus depreciation (with no spending limit) for new assets purchased and placed in service between Sept. 8, 2010, and Dec. 31, 2011. Lawmakers tacked this incentive onto legislation to extend unemployment insurance.
These new incentives should have a real impact for businesses looking to grow as the U.S. economy begins to expand.
For example, Ace Clearwater Enterprises, an aerospace manufacturer in Torrance, Calif., with 225 employees and about $35 million in sales, used the tax breaks to buy new servers, PCs and production line equipment, all with an eye toward improving its manufacturing operations. The company’s enterprise resource processing system ran on old gear, and King Lum, director of progress at Ace Clearwater, says response times were too slow.
“Our servers were 5 years old; we just outgrew them,” says Lum, adding that the company made the purchases before the end of last year so they could take advantage of the tax break.
“I also expect that we’ll take advantage of the tax cuts in 2011, mostly to add flat-screen TVs throughout the plant and bring our web servers in house.”
Historically, the Section 179 deduction has been $25,000 a year. But nearly every year since 2003, Congress has increased the deductible amount to help stimulate the economy. Lawmakers in 2003 quadrupled the deduction to $100,000 a year and let companies deduct packaged software for the first time.
The deduction jumped to $250,000 for 2008 and 2009, and has now doubled again — to $500,000 for the 2010 and 2011 tax years. Section 179 is set to return to its original $25,000 in 2013 unless Congress renews the increase.
Congress has created two vehicles to accomplish essentially the same thing: pump money into the economy by encouraging businesses to make capital expenditures. Although many small businesses don’t make technology purchases in excess of $250,000 (and certainly not up to $2 million), what SMBs should realize is that if they ever planned to make technology and equipment purchases, now’s a good time to do it because of the financial benefits.
Take into consideration today’s contentious climate in Washington, because there’s no guarantee that lawmakers will extend these generous tax benefits beyond next year. At the very least, you should consult your tax accountant to see if taking advantage of the tax incentives makes sense for your company. Given the congressional track record, some type of business purchasing incentive may always be available, but the question is, “Should businesses take that chance, especially when there’s money sitting on the table today?”