By now you should be aware of the economic stimulus package recently enacted by Congress and signed by President Bush. This law, the Job Creation and Worker Assistance Act of 2002, contains two provisions of special interest to equipment buyers and shop managers. Under this act, an increased expensing allowance for capital equipment means that a bigger chunk of the investment can be written off sooner. Another provision allows net operating losses to be carried back 5 years instead of 2 under certain conditions.
The new write-offs are getting the most attention. These provisions are summarized in the table below. Additional information is available at the Web site of AMT—The Association of Manufacturing Technology. (Go to www.amtonline.org.) AMT was a key proponent of this legislation and deserves credit for vigorously pursuing its enactment. Of course, you should check with your professional tax advisor to learn how this law may apply to your shop.
|OLD LAW - $100,000 Machine|
|1st Year Deduction||14%||$14,000||1 Year Tax Saving||$4,900|
|2nd Year Deduction||25%||$25,000||2 Year Tax Saving||$13,650|
|NEW LAW - $100,000 Machine|
|1st Year Deduction||40%||$40,000||1 Year Tax Saving||$14,000|
|2nd Year Deduction||17%||$17,000||2 Year Tax Saving||$19,950|
|IMPROVEMENT OVER OLD LAW|
|1st Year Deduction||26%||$26,000||1 Year Tax Cut||$9,100|
The change in the loss carry-back is getting less promotion because this feature is not directly related to equipment purchases. However, for some shops that weren't very profitable in the last few years, this change will help reduce the tax bite taken out of prior money-making years. A cash refund generated by the new carry-back would be available for acquiring up-to-date technology.
These are significant incentives that should encourage investment in machine tools and factory equipment. Every shop needs to review its recovery and growth plans in light of these tax provisions. It is hard to say how many companies will move forward on new machine purchases based on these savings. (Machine tool builders are clearly hoping for a surge of new orders.) Prospective buyers who have kept their aim on a brighter future and have positioned themselves accordingly stand to get the biggest advantage of these tax breaks if they act promptly.
Here's the scenario we should all be hoping for: A recovery that is already underway as a result of natural market influences, such as consumer spending, will continue. These new tax breaks will provide a timely but temporary treatment that speeds and strengthens this recovery. No one will mistakenly believe that the government can provide a miracle cure for the economy or that miracle cures are necessary. Competitiveness and profitability in manufacturing will once again come primarily from the merits of sound management, prudent investment and old-fashioned hard work.