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WSJ picks up Accelerated Depreciation

Posted By Barry Ritholtz On October 1, 2004 @ 5:54 am In Media | Comments Disabled

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The WSJ column “On The Other Hand” [1] makes mention of our little study of Accelerated Depreciation of Capital Spending (ADCS) [2]

One of the most interesting items within the article is this little tidbit: “Others have echoed the theme that there may be less to the tax break than meets the eye. A Smith Barney survey of 100 Fortune 1000 chief information officers in early 2004 found that nearly three-quarters said the tax break would have no impact on the timing of computer-hardware purchases this year.”

That’s too bad; the expiring tax break is something that companies should take full advantage of now while they can. Companies should (obviously) not purchase items they do not have a need for; But I continue advocating that any firm that needs to buy items in the first half of 2005 should be doing so right here and now.

Here’s an excerpt:

“In 2002, Congress passed a major business tax break intended to persuade tight-fisted corporate executives to help stimulate the economy by buying more equipment, machinery, computers and software.

The following year, lawmakers expanded the tax breaks but placed a firm deadline of Dec. 31, 2004, on the offer. This fast-approaching cutoff date could spur a capital-spending spree by last-minute corporate bargain hunters. If so, that might provide a nice boost to the economy and help stocks fight their way out of a long period of sluggishness.

The tax break comes in the form of a higher write-off limit for depreciation, an accounting device that acknowledges the fact that purchased equipment and technology eventually wear out or become obsolete. The 2003 tax break allows businesses to take a 50% depreciation “bonus.” That is, they can claim as an expense for tax purposes an amount equal to half the value of any new equipment they buy, and add on the amount of depreciation expense they would have claimed otherwise.

Front-loading depreciation write-offs like this can significantly lower taxable income and thus reduce corporate tax bills in the short run. For some businesses, the tax break could even mean the difference between profit and loss on the purchase of equipment. “It really affects the issue of when can I afford to buy this thing,” says James Mack, vice president for tax and economic policy at the Association for Manufacturing Technology, a trade group representing makers of machine tools.”

I do believe that if ADCS had a negative effect on hiring, then when it expires, it should have a conversely positive impact. I buried that ray of sunshine in the very last line of the ADCS report [2], and it tends to get overlooked. But it may actually turn out to be important . . .

Sources:
Tomorrow’s Spending Today [1]
‘Depreciation Bonus’ Could Give Stocks and the Economy a Lift;
But Is There a Lasting Benefit?

David Landis
September


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URL to article: http://www.ritholtz.com/blog/2004/10/wsj-picks-up-accelerated-depreciation/

URLs in this post:

[1] “On The Other Hand”: http://online.wsj.com/article/0,,SB109639692416530282,00.html

[2] Accelerated Depreciation of Capital Spending (ADCS): http://bigpicture.typepad.com/comments/2004/09/accelerated_dep.html

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