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 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.
Business tax breaks
Under the economic stimulus package:
Businesses can immediately write off 50 percent of the cost of new equipment purchased in 2009
Small businesses can immediately write off $250,000 for capital expenditures made this year
Small businesses with gross receipts of $15 million or less can carry back net operating losses for five years instead of two years
Some companies can defer taxes on certain types of business debt repurchased before 2011
Source: Senate Finance Committee
"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.