D.C. dithering on depreciation forces capital spending delays
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Last year, Richard Pelletier, the owner of Nashoba Valley Winery in Bolton, found himself in need of new equipment for the business — a keg machine and some kegs and barrels, vehicles and a TV and furniture.
In previous years, he knew, he could have gained a tax advantage by deducting the cost of these kinds of purchases under a federal rule concerning depreciation known as Section 179. But the government hadn't finalized the amount of capital investments businesses could write off. So Pelletier waited. By the time Congress passed a provision with a relatively high $500,000 cap and President Obama signed it into law, it was Dec. 19, leaving less than two weeks to make the purchases.
“It was very difficult purchasing and getting the equipment into operations in time,” Pelletier wrote in an email interview. “It is tiring trying to run a business and not knowing what the rules are.”
This year, a similar scenario is playing out. In February, the House of Representatives passed a plan to make the $500,000 cap permanent. But Obama called for more clarity on how the tax break will be funded without adding to the federal deficit. It's unclear when businesses will have the information they need to decide on capital investments.
Leominster CPA Robert Alario said the fluctuations and uncertainty around the deduction have made it impossible to count on. “We recommend to our businesses to base their equipment purchases on need and rate of return and not necessarily on what the tax benefits are, because the way Washington is today you can't predict what's going to be the Section 179 depreciation,” Alario said.
The Section 179 deduction is part of the tax law concerning depreciation, which lets companies account for the loss of their equipment's value as it deteriorates. Under Section 179, the depreciation of some items can be counted in the year they're purchased instead of gradually as they wear out. The rule was once a fairly small consideration. In 2000, it was available only for up to $20,000 in purchases each year. The cap rose slowly until, between 2007 and 2010, the federal government hiked it from $125,000 to $500,000 in an effort to boost capital investments. At the start of this year, it automatically dropped to $25,000, and it's unclear so far whether it will be raised again and, if so, whether the increase will be permanent.
Accountants and businesses say that when the deduction is passed on a temporary, retroactive basis, it loses its ability to encourage investment.
Like Alario, Dennis Corsini, a partner with McDonough, McDonough & Corsini in Sutton, said he wouldn't encourage a client to assume that the higher cap will apply to any purchases they make this year. “You can only plan within the constraints of what's currently going to be acceptable,” he said.
Conservative approach on the farm
Brian Gay, president of Mendon-based Maple Farm Dairy, which delivers fresh milk to more than a dozen local towns, said he's conservative about making new purchases, regardless of any tax benefits.
“I don't really buy it until I need it,” he said. “There's a bunch of things I want to buy, but I'm not going into hock.”
Besides, Gay said, his main capital assets are milk trucks, and no one makes them anymore, so he just does his best to keep the ones he has running.
Ann Starbard, who raises goats and makes fresh goat cheese at Crystal Brook Farm in Sterling, said equipment expenses are a big deal for the family enterprise.
When it comes to tax deductions, Starbard said it's helpful to have options. Profits vary in farming depending partly on the weather, so some years might be better than others for taking a depreciation deduction.
Douglas Frost of Frost Manufacturing in Worcester said he looks for tax advantages when he's ready to make a big purchase, but it's not a motivator to buy something he wouldn't otherwise.
“If something's around then I wait a few months for it,” he said. “I haven't bought that much equipment lately.”
(Image credit: FreeDigitalPhotos.net)
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