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Friday, February 20, 2009
Digging into the stimulus


Baltimore Business Journal - by Kent Hoover Washington Bureau Chief


Need new equipment?

The American Recovery and Reinvestment Act gives companies two reasons to invest in new equipment this year, and it provides many small businesses a way to find the money to make these purchases.

The $787 billion economic stimulus package extended two tax incentives for business investment through the end of this year. Companies can write off 50 percent of the cost of new equipment immediately, instead of following the usual depreciation schedules. Small businesses can expense up to $250,000 of new equipment purchases this year.

These breaks can be a powerful incentive for business investment, especially when combined, said Bill Smith, director of the national tax office for CBIZ MHM.

Smith cites an example of a small business investing $500,000 in equipment that normally is depreciated over five years. The business could take the $250,000 Section 179 expensing limit and then apply 50 percent bonus depreciation. The business could then depreciate $25,000 of the remaining $125,000 of the investment this year.

The end result: The business could write off $400,000 of the $500,000 investment this year, instead of having to wait to recover this money.

That’s good for cash flow, but many companies may not have the cash or credit to make this kind of investment, especially in such a weak economy.

“A lot of small businesses aren’t going to have the capacity to do it right now,” said Clint Stretch, managing principal for tax policy at Deloitte Tax.

The economic stimulus package provides a solution, however, to businesses with less than $15 million in annual revenue. The new law allows these businesses to carry back net operating losses for five years, instead of the previous two-year limit. A business that currently is losing money could apply these losses to a previous profitable year and then claim a refund for taxes paid that year.

“That’s going to inject a lot of cash into the business community,” Smith said.

The refunds could be used to make investments in new equipment — and take advantage of this year’s tax incentives — or be used simply to keep the doors open.

Companies with more than $15 million in annual revenue aren’t eligible to carry back their net operating losses five years, however. House-Senate negotiators made middle-market companies and large corporations ineligible for this benefit in order to trim the cost of the $787 billion stimulus bill.

• Digging into the Stimulus -Article