Tax Cuts Could Pump $800M into ChannelBy John Hazard | Posted 2006-06-14 Email Print
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A provision of the Bush Administration's tax cuts allows SMBs to write off up to $100,000 for capital purchases.
Just one of provisions of the $70 billion in tax cut extensions championed through congress by the Bush Administration this spring, Section 302 of HR 4297 is expected to pump an estimated $800 million into the channel from 2007 to 2009.
The act amends Section 179 of the Internal Revenue Service Tax Code, allowing small businesses with less than $400,000 in annual revenue to write off up to $100,000, up from $25,000, for capital purchases.
It was set to expire in 2007.
The provision will pump an estimated $2.3 billion into the IT industry, according to the Congressional Budget Office, which estimated the bill's impact.
About $800 million of that would wind its way through the channel, said research firm IDC and the CompTIA (Computing Technology Industry Association).
The provision allows businesses to write off up to $100,000 of a purchase in a single year, rather than the cost of the purchase over its life expectancy, which is typically three to five years.
If a small business owner finances the project over a similar period, that initial purchase write off would appear almost as a "windfall" in the initial year, said Lamar Whitman, a tax and SMB (small and midsize business) policy analyst at CompTIA.
"This will have an accelerating effect on what SMBs are able to buy," Whitman said. "They're essentially getting the tax benefit in year one. It's an immediate windfall. It really does spur purchases. Not just in technology, but trucks, cars, anything that's not real property. This will spur immediate spending by SMBs."
Because the average IT purchase for a company of the size in question is less than $50,000, the measure would almost certainly be used in full by interested parties, according to IBM's finance arm, IBM Global Finance, which has been watching the tax law closely.
But it may not offset the rise in interest rates that has dimmed IT spending for SMBs, said John Callies, general manager of IBM Global Finance.
"The one thing we're always worried about is, 'is there enough money available for SMBs? Is there enough liquid capital in the market?'" Callies said.
"This has a great impact for your tax books, if you can get the money to spend in the first place. If you have a situation where interest rates rise, forget about a tax incentive. It's only an incentive if you have the money available to maximize it."
In light of tighter lending by commercial financial institutions, IBM Global Finance has taken steps in 2006 to make more money available to its partners and their customers.
For VARs, the main issue surrounding HR 4297 is awareness, said Jim Locke, president of J.W. Locke and Associates.
"I would venture to guess that the majority of SMB VARs have never discussed the implications and benefits of IRS section 179 with their clients," Locke said.
"Hence, the client's accountant wins after the sale when he points out the deduction to the client and 'saves' them from the tax man."
"SMB VARs need to focus more on this type of business information and be more conversant about it with their clients," Locke said.
"It has the potential to not only win them some sales but elevates them in the eyes of their client to that highly coveted 'trusted advisor' status that many seek but few attain."
HR 2397, which is an extension of the Tax Increase Prevention and Reconciliation Act of 2005, passed through congress and was signed into law May 17, extends the Bush Administration's tax cuts through 2009.
While the bulk of the extension remains mired in party bickering and controversy, the small business provision was popular and likely to live on past the two-year extension, Whitman said.
"Something like this has almost no real cost to the government," he said. "The write offs were to be spread out over three years anyway; it just accelerates it. But for the business owner thinking about making a purchase, it is a big deal."