Time To Act

Now that the news about the recently passed $350-billion Bush tax cut package has sunk in, it’s becoming clearer what it means to manufacturers. It means a lot.

Now that the news about the recently passed $350-billion Bush tax cut package has sunk in, it’s becoming clearer what it means to manufacturers. It means a lot. The Jobs & Growth Tax Relief Reconciliation Act of 2003 contains a 50 percent expensing allowance for machine tools and other equipment and an even greater tax benefit for small job shops. (Keep reading for details.) The resulting tax savings amount to a hefty discount on the initial cost of a machine.

Now it is also becoming clearer what needs to be done for the manufacturing industry to get the most out of this tax cut. It calls for a strong and renewed effort from builders of machine tools and other capital equipment to promote investment in new equipment. CEOs and other top managers will have to get out there with their sales forces to lead the rally. The message that certain provisions of this tax cut are too good to pass up will be most effective coming directly from CEOs connecting with the top decision makers at end-user shops and plants.

Likewise, it behooves these manufacturing CEOs and shop owners to take the message to heart. If you’re one of them, now is the time to reconsider equipment purchases that were put on hold because a wait-and-see attitude seemed safest. The value of waiting any longer has clearly diminished. As the law stands, the window on the best tax savings for these investments will close at the end of 2004.

Shop owners ought to revisit their wish lists and rethink some of the latest metalworking technology that they’ve been living without. What may have seemed out of reach just a few months ago may now be quite affordable. More important, the new capabilities and benefits of this technology can help cut costs and streamline operations. Systems that include flexible automation are an especially strong value because their impact on labor costs is a positive factor. Now is the time to place the order because the opportunity is time-limited!

The 50 percent expensing provision allows metalworking companies in the 7-year depreciation class to write off 57 percent of their new equipment purchases in the first year. The equipment must be ordered between May 6, 2003, and December 31, 2004, and placed in service by the later date. The old 2002-depreciation law in effect at the passing of the new law allowed 40 percent. (For perspective, the first-year write-off allowed under the pre-2002 law was normally only 14 percent.) Companies in the 5-year depreciation class can deduct 60 percent of their new equipment purchases in the first year.

AMT—The Association For Manufacturing Technology put together the chart above to show how the new write-off provision works. The example—a $100,000 piece of equipment such as a machining center—is easy to relate to. The special rule for small businesses is especially worth noting. For example, a job shop making less than $400,000 in total depreciable capital investments per year gets to expense the first $100,000 in equipment purchases in addition to the 50 percent bonus depreciation.

Tax Incentive For New Equipment Orders
Let's assume that the Peekless KeyHole Co.* orders a new machine tool costing $100,000. Peekless can write off 57 percent of the asset in the first year and 69 percent over 2 years (compared with 14 percent and 39 percent under the old law). This adds up to a first-year tax cut of $15,050 on a $100,000 machine.
Old Law (pre-2002 temporary change) — $100,000 Machine
First-year deduction 14% $14,000 First-year tax saving    $4,900
New Law — $100,000 Machine
First-year deduction 57% $57,000 First-year tax saving    $19,950
Improvement Over Old Law
First-year deduction 43% $43,000 First-year tax saving    $15,050
Special Rule For Small Business

Small businesses (those whose equipment purchases of all kinds do not exceed
$400,000) get to expense the first $100,000 until December 31, 2005. The 50
percent expensing allowance can be taken on the remaining basis of the machine.
In other words, a qualifying small business that buys a $100,000 machine can
expense it all in the first year. A $200,000 machine could qualify for a $157,000*
first-year deduction (78.5 percent of the asset), and a $300,000 machine could
qualify for a $214,000* first-year deduction (71.3 percent of the asset).

*Example assumes that this manufacturer is in the 7-year asset depreciation
class. For manufacturers in the 5-year class, the first-year tax saving is $21,000
on a $100,000 machine, and the tax cut is $14,000.

Enacting this provision was AMT’s top legislative priority. AMT credits Rep. Jerry Weller (R-Ill) and Rep. Philip English (R-Pa) for leading the effort to enact this key provision as part of the House version of the bill, which survived review in the Senate. Officials of AMT, of course, are concerned about ending the slump in spending on productive equipment, which has hit AMT’s membership hard. The broader issue, however, is stimulating a lagging manufacturing economy, about which AMT officials are also deeply concerned.

So now that the law is in effect, the priority is securing the effect of the law. It won’t happen entirely on its own. What is really needed is the momentum from builder CEOs getting into the act to be sure this sales tool isn’t squandered. Their personal contact with customer CEOs will go a long way to convert those who are still hesitant about the need to upgrade operations and enhance competitiveness.

Much is at stake. A significant increase in new equipment orders in response to the new write-off provisions would prove that this tax incentive is working as intended. That in turn will encourage lawmakers to consider improving and extending the provision past its current end date.

Many economists are focusing on positive trends that bode well for stronger economic growth later this year, including incentives in the tax cut that effect consumer spending. Credit rates are at historic lows. The dollar exchange rate favors more exports. Defense spending is up (although we’d like to see a stronger emphasis on increased domestic sourcing, as was recently highlighted in the House version of the DoD authorization bill). The time for moving past wishful thinking and on to purposeful action is at hand.

The new write-offs put shops and plants in a better position to make investments than they’ve been in for years. And there may not be a better time than now to get into position for an economic upturn.