business

Short-term federal tax incentives could help small-business owners buy equipment and also give the nation's economic recovery a nudge. For some entrepreneurs, incentives such as accelerated depreciation (details below) also could serve as a starting point for expanding a company or remaking it into a bigger, more efficient, more competitive enterprise.

That's been the case at Minnesota Wire and Cable in St. Paul, where Chairman and Chief Executive Paul Wagner has pursued tax incentives and defense-related research-and-development grants to reshape his company.

Over the last six years, the strategy has boosted revenue, created jobs and enabled the company to carve out a niche in cutting-edge products, such as stretchy wires, to fend off overseas competition.

Wagner traces the genesis of his new business model to tax incentives -- specifically accelerated depreciation on new equipment -- offered after the 2001 terrorist attacks.

That incentive is back and others also are available this year under the federal stimulus package, formally known as the American Recovery and Reinvestment Act of 2009, that President Obama signed into law in February.

"I started buying labor-saving robots and got addicted to them," said Wagner, who nearly tripled his capital spending to just shy of $1 million when he initially made use of the incentive. "We got much more aggressive about buying capital equipment. The accelerated depreciation, I do like that."

For non-accountants: Accelerated depreciation offers a method to defer corporate income taxes because it reduces taxable income in current years. This encourages businesses to purchase new assets, thereby boosting capital spending and, it is hoped, the broader economy. To be sure, the return of accelerated depreciation won't transform a business overnight.

But it is one of several one-year business incentives in the stimulus act that are worth examining, according to Robert Ranweiler, tax principal in the Minneapolis office of LarsonAllen. The firm, with offices in Minnesota, Wisconsin and seven other states, provides accounting, tax, consulting and advisory services to organizations and individuals managing business ventures and finance.

Some stimulus provisions could benefit companies that are considering buying new equipment while others could help struggling companies hang on, Ranweiler said.

"From the perspective of businesses [that] are looking at investing in property, a couple of these provisions could be very applicable and certainly sway it in the direction of making the purchase or doing the expansion if they qualify and if it makes economic sense," Ranweiler said. "It's an opportunity to get capital into the hands of businesses at a time that they may well need it."

Seek professional advice

Of course, business owners who may elect to make use of any of the incentives should first seek professional advice. They also should carefully evaluate whether buying new equipment now is a good idea.

Just because "there are incentives here to go out and buy and expand, it still needs to make economic sense," Ranweiler cautioned. "In my opinion ... businesses should not go out and just buy stuff ... to get a tax write-off. On the other hand, if they're wavering on whether now would be the time, this provides the incentive to go out and to do that expansion today."

Generally speaking, accelerated depreciation allows businesses that buy new equipment to take greater tax deductions sooner rather than later on the loss of value, or depreciation, from wear and tear on that equipment.

Under the 50 percent bonus deduction provision contained in the stimulus package, businesses can immediately deduct half the cost of new equipment placed in service this year, Ranweiler said. They then can deduct the remainder over the rest of the recovery period, typically five to seven years, spelled out in the tax code.

"It is an incentive for businesses to go out and buy new equipment and be able to get a nice tax write-off right up front on that purchase as opposed to having to wait to depreciate the asset and get the tax benefit over some number of years," Ranweiler said.

Business owners who qualify, Ranweiler said, can combine bonus depreciation with another stimulus provision that allows them to expense and deduct immediately up to $250,000 of the cost of new equipment -- things like copiers, computers, desks, chairs and machines for a factory.

For smaller businesses

"It is intended very much for smaller businesses," Ranweiler said of the provision, officially known as the Section 179 expense amount extension. "Larger businesses will not qualify, because once the asset additions get up over $800,000, you start to lose the write-off.'' At $1,050,000 in new equipment, then, the deduction goes away entirely. This provision, Ranweiler said, applies only to tax years beginning in 2009.

Combining the two, a business owner who buys qualifying new equipment could expense up to $250,000 of the cost under Section 179, take 50 percent depreciation on any remaining qualified cost of that equipment and then get regular depreciation beyond that, Ranweiler said.

A separate provision of the stimulus act could help businesses that were doing well in recent years but have struggled during the downturn. Businesses that incur a net operating loss normally can apply that loss to the two prior tax years to recover taxes they had paid in those years, Ranweiler said. The stimulus plan allows small businesses with a 2008 loss to apply that loss back to the third, fourth or fifth prior tax year.

"The theory is they can take today's loss to carry back to some previous year to free up tax that they previously paid, which would give them capital, which hopefully would allow them to continue and keep jobs and maybe expand," Ranweiler said.

This "tax-loss carryback" provision, however, applies only to businesses with average annual gross receipts of $15 million or less in 2006, 2007 and 2008, Ranweiler said. Proposed amendments would remove that limit and open the benefit to all businesses except those that have received bailout money.

Todd Nelson is a freelance writer in Woodbury. His e-mail address is todd_nelson@mac.com