USA Today: Tax break may spur business spending, hiring

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Washington, D.C., December 21, 2010 | comments

By Laura Petrecca; USA Today

One small provision in the new tax law could spur big-ticket business spending — and if a government analysis proves correct, bolster hiring.

The "100% expensing" policy allows businesses in 2011 to fully write off "productive capital investments" such as delivery trucks, machines and aircraft rather than depreciate the cost over a period of years.

With the immediate write-off, firms will have lower taxable income and more money to spend. A Treasury Department analysis estimates 2 million companies will take advantage of it.

The administration says this will prod economic growth as it:

•Gives companies extra cash to spend on new employees as well as on expansion.

•Encourages firms to make purchases they've put off. This could generate roughly $50 billion in added investment, Treasury's analysis says.

•Fosters hiring at manufacturers as they respond to demand.

"The expensing provision will encourage sales of airplanes, engines and avionics in a market that continues to experience a very slow recovery," says Pete Bunce, CEO of the General Aviation Manufacturers Association.

A business that makes a $1 million investment and pays a 35% tax rate could shave $350,000 from its 2011 taxes instead of perhaps $50,000 under current law, Treasury says.

Some economists are skeptical that the provision will pack all the punch the government predicts.

Even with the tax break, still-skittish businesses may not invest in new equipment until the economy further stabilizes, economist Joel Naroff says.

He says the provision could also have an unintended consequence: U.S. firms buying equipment overseas. "Nothing in the law says you have to buy your investment equipment from U.S.-based companies," he says.

Economist Ed Yardeni says companies need employees to run the new equipment, so this "makes sense" at first glance.

But since new equipment can boost productivity, "some companies will take advantage of that and be able to cut back on employment."

Grafton "Cap" Willey, a managing director at accounting firm CBIZ Tofias and former chairman of the National Small Business Association, says an immediate write-off can simplify accounting for smaller firms.

But he cautions firms not to buy goods simply to get a bigger write-off. "The decision has to be economically sound," he says. "Don't let the tax deal wag the dog."

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