In his State of the Union address, President Barack Obama suggested measures that would ease credit for small businesses seeking working capital and equipment financing. He proposed diverting $30 billion from the Troubled Asset Relief Program to assist community banks with their small-business lending. Another measure would extend a temporary tax break that allows businesses to accelerate equipment purchases through the end of the year. The extension of the incentive, which provides a 50% write-off of the cost in the first year, would help sellers and buyers of capital equipment, said Monica McGuire of the National Association of Manufacturers.
Extending the break, which expired Dec. 31, would save companies that make purchases of equipment such as tractors, wind turbines, solar panels and computers a total of $38 billion over this year and next by allowing a 50 percent write- off of the cost in the first year, the official said.
Bonus depreciation was an element of the $787 billion economic-recovery legislation adopted last February. It has also been a feature of earlier stimulus measures, including those adopted in 2002 and 2003 under President George W. Bush.
While companies will realize tax savings in the year they purchase qualified equipment, they’ll pay higher taxes in subsequent years when the property is fully depreciated.
Most major business groups including NAM and the U.S. Chamber of Commerce have urged lawmakers to adopt accelerated depreciation schedules as a stimulus measure. The policy is supported by top Democrats including House Speaker Nancy Pelosi and Senate Finance Committee Chairman Max Baucus.
Economists have challenged its efficacy as a stimulus measure. A study by Federal Reserve Board economists Darryl Cohen and Jason Cummins found the 2002 subsidy, which provided a 30 percent write-off in the year equipment was purchased, had “a very limited impact” on investment spending.
A subsequent study by Treasury Department economist Matthew Knittel found the bonus depreciation incentives from 2002 to 2004 were largely ineffective. Companies claimed the break for only about 60 percent of their eligible investments, he said. That may be because they weren’t in a position to benefit because of losses and therefore had no tax to reduce with the deductions, he wrote.
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