An extension to a federal tax benefit for equipment purchases could kill the market urgency the measure was designed to create.
The bonus depreciation law, which was in effect during the 2008 and 2009 tax years and could be reinstated for 2010, lets companies write off equipment purchases more quickly to encourage investment now, while money is still tight for many businesses.
The tax benefit allows 50 percent first-year depreciation for some types of property, including machinery and equipment, office equipment, printing presses, signs and more.
The provision encouraged Riley Construction Co. Inc., Kenosha, to invest heavily last year in equipment such as forklifts and utility trucks, said CFO Pete Sinsky.
“It was really a nice windfall,” he said. “It definitely played into our decision to purchase equipment. We wanted to accelerate some purchases to get the deduction.”
But the measure was initially created as a temporary stimulus, and the continued extension of the benefit could curb the urgency it is supposed to create, said Joe Rosenberg, an analyst at the Washington, D.C.-based Tax Policy Center, a nonpartisan joint venture of the Urban Institute and Brookings Institution.
“That incentive goes away if the benefit renewed each year,” Rosenberg said. “There’s no need for companies to rush out if they think Congress will renew it the next year.”
The Milwaukee-based Association of Equipment Manufacturers is urging renewal of the tax benefit, however, saying it is necessary for the survival of its industry.
“There’s lots of uncertainty in the marketplace right now,” said Anne Forristall Luke, AEM’s vice president of government affairs. “So many businesses are close to the margins. We need to create some certainty.”
In a letter Wednesday to the House Committee on Small Business, which held a hearing on the matter, AEM President Dennis Slater said the equipment industry “has been devastated in recent years as we lost 27 percent of our workforce and saw sales drop by half.”
“This is a tax provision that applies across the economy,” Luke said. “It’s a really big incentive. The cost of the provision is far outweighed by the return to the economy.”
The tax benefit does not cost the government too much in the long run, said Chuck Marr, director of federal tax policy for the Washington, D.C.-based Center on Budget and Policy Priorities, because it simply delays taxes that eventually will have to be paid. As such, the policy is not necessarily harmful, but it is inefficient, he said.
“If it is extended, it probably wouldn’t do very much,” Marr said. “A lot of companies are hoarding money right now.”
A similar benefit in place for the 2003 to 2005 tax years created little effect on purchasing, Rosenberg said.
But companies such as Riley prove the benefit can stimulate some spending, Sinsky said.
“It will spur people to purchase things they might otherwise wait on,” he said. “I’m tired of hearing of businesses closing their doors or moving operations overseas. We’ve got to be creative and help businesses survive here.”