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Small business tax breaks create incentives for capital investments


When the federal government extends a tax break known as the Section 179 deduction, it’s a signal to purchase needed equipment now rather than later, says Aaron Forrester.

Forrester’s employer,Insta-Pro International Ltd. in Urbandale, will take advantage of the incentive to purchase a steam generator and other equipment for its research and development department now rather than waiting until next year.

“We’re always looking for ways to minimize the tax payments that we have to make,” said Forrester, the company’s controller. “It definitely helps us to make the decision to purchase something in the fourth quarter rather than in the first quarter.”

The Small Business Jobs Act of 2010, signed by President Barack Obama in September, provides several tax breaks for small businesses, among them an extension and expansion of the Section 179 deduction. Under that provision, small businesses can expense the full amount of an equipment purchase, rather than writing off a portion of the expense each year through depreciation.

“The net cash effect is that you’re paying only 60 percent of what you would have,” Forrester noted, “since your taxable income goes down by the purchase price of the equipment.”

The legislation extended other popular tax breaks, including the 50 percent “bonus” depreciation provision, through the end of the year.

Though tax breaks aren’t going to cause businesses to purchase equipment they wouldn’t have bought anyway, it will accelerate the timing of those purchases, said Marv Debner, managing partner of LWBJ Financial LLC in West Des Moines. “The answer is almost always, ‘Yes, I’ll buy it today because of the tax benefits.’”

Year-end tax planning is just getting started, so it’s too early to know how many clients may be similarly motivated to make purchases, he said. “We meet with all our clients to talk with them about what they need to do before year end.”

Debner said it’s also difficult to know whether tax breaks offered in the stimulus bill last year will mean that businesses have already made all the capital purchases they’re going to make for a while.

“Yes, we’ve had this extension of bonus depreciation for several years now, but equipment constantly wears out,” he said. “So extending it is certainly an incentive for them to go out and make that expenditure.”

With the uncertainty over whether Congress will extend the Bush-era tax cuts set to expire at the end of the year, some small businesses may opt not to take the bonus depreciation, Debner said. “If they don’t, those dollars will be there to be deducted against that higher tax rate down the road.”

Because Insta-Pro sells about 70 percent of its oilseed processing equipment outside the United States, Forrester said he doesn’t expect to see a big increase in sales because of the U.S. tax breaks.

However, during harvest season, “we always have kind of an uptick at this time of year anyway,” he said.

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