Will the stimulus's tax breaks stimulate

January 26, 2009
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Many of the business tax cuts in the $825 billion economic stimulus draft bill from Democrats in the U.S. House have been offered before: in last year’s stimulus, in last summer’s housing act and in the fall bailout bill. Two were made available after the 2001 terrorist attacks.

Regardless of the timing, though, the idea behind the cuts is the same: The government is offering incentives to entice businesses to make capital investments that create jobs.

“What we have for ’09 has some elements of enhanced expensing or depreciation for capital investment. It certainly is an encouraging incentive to some businesses, but I guess they’ve got to be thinking about being in an expansion mode, or needing new equipment, or doing some build-outs to be able to make use of that,” said Bill Roth, a partner at BDO Seidman LLP, an accounting and business consultancy firm.

“I think for a lot of companies these days, some may try to keep the old stuff running before taking up the commitment to buy new. In order to buy new, they probably have to borrow, and we all know what the credit markets are right now,” added Roth, who also writes a column in the Business Journal.

One of the business incentives allows cash-strapped companies to go back five years, instead of the standard two years, to claim tax credits on past profits. Another one offers “bonus” depreciation for firms that invest in new plants and equipment.

A third doubles the amount small businesses can write off for capital investments and equipment purchases. And a fourth lets businesses claim a tax credit for hiring disconnected youth and military veterans.

“Even if they wanted to, or needed to, expand or acquire some new capital equipment, how are they going to be able to finance it in a way that’s not prohibitive?” asked Roth.

Tom Koster, a senior manager at BDO Seidman, said two of his clients have tried for nearly a year now to get financing. They’ve found the going very difficult and are having second thoughts about proceeding with their plans.

“They have been in almost weekly negotiations with their banks, in terms of staying within their debt covenant for their line of credit for other debt, which would put their capital expenditures probably under a microscope, whether they would really go out and do these types of investments,” said Koster, who added that lenders are more often requiring hard-asset collateral for loans than in past years.

“Or they’ll have to find a new bank, or get the manufacturer to help finance a capital expenditure,” said Roth.

The provision that allows companies to go back five years to claim tax credits was offered in March 2002 following the terrorist attacks the previous September; Roth said it was highly effective back then for companies that were turning profits at the time.

“It think it’s positive from that standpoint because I think, certainly, people saw some real benefit then. We also had the same, or similar, bonus depreciation rules in place, too, at the same time, post-9/11. So some of the business provisions are very similar to what came in right at the end of ’01 or early ’02 to try to jump-start things at that point,” said Roth.

The cost of these tax incentives to the federal government has been estimated at roughly half the entire stimulus package. But no one is really sure at this point how much the cuts will cost because the estimate is based on the response the government received in previous years when similar incentives were offered and credit wasn’t as tight.

“They’re rarely ever on, in terms of their estimates. I think (the estimate) certainly gives everyone a sense of what the magnitude might be, whether it’s a very large item or a small item. But I think just their way of how they create these estimates at times gets difficult to know exactly what’s going to be the cost. Or if it’s a revenue raiser, what’s going to be the actual revenue raised,” said Roth.

One incentive that President Barack Obama wanted — a $3,000 tax credit for every new job created — didn’t make the draft. Democrats felt that trying to track, sort and record such a credit would be an expensive and possibly overwhelming task to undertake, and they left it out. At press time, the U.S. Senate hadn’t carved out its bill.

Roth and Koster see the incentives as an overall positive that accelerates the depreciation benefits by getting those deductions out front faster. So the question becomes whether a company is in the position financially to take advantage of what the stimulus has to offer. The answer would be clearer if the credit markets were looser and if companies had deeper cash reserves. Right now, though, some might think the risk may be too much to take.

“Do they really need to make the capital investment at this point? Are they in a position for their banks to finance it as this point?” asked Roth. “I think everyone is a little gun shy.”

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