Stimulus Gives Businesses a Boost
Now that President Obama has signed off on the latest stimulus package, politically savvy IT administrators can read the fine print and work with their business executives to secure a slice of the pie.
The American Recovery and Reinvestment Act of 2009, signed into law in mid-February, is a far-ranging $787 billion package designed to lift the economy out of its doldrums through tax incentives and government spending — and some of it directly benefits small businesses. The new law features more than $280 billion in tax benefits, including $75 billion in tax relief for businesses in 2009 and 2010, according to CCH, a Riverwoods, Ill., tax research firm. The law also gives the Small Business Administration (SBA) $730 million to unlock the credit markets and increase small business loans.
As an IT administrator, here are five ways you can work with your business executives to take advantage of the economic recovery package and grow your company. Some benefits specifically apply to technology purchases, while others are intended to help a company’s overall bottom line.
1. Equipment Expensing
The stimulus package extends a tax deduction that allows small businesses to deduct up to $250,000 a year in new equipment purchases, including technology such as servers, PCs, networking equipment and off-the-shelf software.
Section 179 of the tax code allows small businesses to take a deduction for equipment purchases in one tax year rather than having costs deducted over the useful life of the equipment, which is typically five to seven years. Historically, the deduction was $25,000 a year, but the government increased the annual deduction to $100,000 in 2003. Congress has renewed the higher deduction several times, including last year when it increased the deduction to $250,000. The new stimulus law keeps the deduction at $250,000 for equipment purchases for the 2009 tax year. The spending limit for Section 179 in 2009 also remains at the 2008 level of $800,000.
2. Bonus Depreciation
The law keeps in place a 50 percent bonus depreciation that was instituted in 2008. If a business buys $500,000 in equipment in 2009, $250,000 can be immediately deducted with Section 179. Of the remaining $250,000, the business can deduct half ($125,000) in the same year by applying the bonus 50 percent depreciation. The remaining $125,000 can be deducted under the normal depreciation schedule.
“If you need equipment, it certainly makes it less of a financial burden to buy it because you can get a full write-off — or almost a full write-off — in the year you purchased it,” says Mark Luscombe, a CCH principal federal tax analyst.
3. SBA Loans
SBA’s portion of the stimulus package includes $375 million to temporarily eliminate SBA loan fees and increase the SBA’s guarantees on some loans to 90 percent. The previous guarantees ranged from 75 percent to 85 percent.
Eliminating loan fees will lower the cost of the loans for small businesses, while increasing the loan guarantee will reduce the risks for third-party lenders, making it more likely for lenders to give out loans, says SBA spokesman Mike Stamler. So far, the strategy is working: A month after the stimulus bill’s passage, SBA saw a 26 percent increase in the number of SBA loans given out by lenders, he says.
Here are two specific loan benefits from the stimulus bill: SBA’s 7(a) loans allow businesses to buy land, buildings, equipment, machinery, furniture and other materials. Historically, SBA charged a 2 percent to 3.75 percent fee to guarantee loans. By temporarily eliminating the fee, a small business that receives a $300,000 7(a) loan would save $8,100 in fees ($300,000 x 90 percent guarantee x 3 percent fee = $8,100).
SBA has also temporarily eliminated fees for borrowers and third-party lenders on its Certified Development Company (504) loans, which offer financing for major assets, such as land, buildings, machinery and equipment. For a 504 loan, SBA will temporarily eliminate a 1.5 percent application fee, which would save a business $9,000 on a $600,000 loan, according to the agency.
4. New Public Works Projects and Other Spending Projects
The economic recovery package is full of federal funds to aid local and state governments with infrastructure projects. For example, the Department of Transportation is providing $27 billion to states to fix roads and bridges. About $19 billion is earmarked for healthcare IT spending, $7 billion will go to build high-speed rail and an additional $650 million will go to increasing educational technology in schools.
Small businesses in these specific sectors can take advantage of the funds, says Tim Kane, senior fellow in research and policy at the Kauffman Foundation, which is devoted to entrepreneurship. “They can be direct contractors or subcontractors.”
5. Other Tax Benefits
Small businesses that lost money in 2008 but were profitable in prior years can “carry back” that loss to their prior years’ tax returns by amending returns as far back as five years. Previously, small businesses could only carry back a loss two years. This new tax provision allows businesses to get refunds from prior tax years, Luscombe says. The five-year carryback for business net operating losses is available only to businesses with $15 million or less in gross receipts.
Sanford Ehrlich, executive director of entrepreneurship for the Entrepreneurial Management Center at San Diego State University’s College of Business Administration, says the stimulus package helps only a small percentage of small businesses. Many small businesses are dealing with a cash crunch, so they may not qualify for loans, be able to afford new equipment or be in position to take on more debt, he says.
The stimulus package is good for financially sound businesses that are looking to expand, says Gary Naumann, lecturer in entrepreneurship and director of the Spirit of Enterprise Center at Arizona State University’s W.P. Carey School of Business.
“Unsettled times and dislocation create opportunity,” he says. “There are instances where you expand because others are pulling back and there’s an opportunity in the market. Maybe you can pick up market share. You have to be judicious and figure out if you have the capacity to do it.”
Dan Haugland, founder and CEO of BestBill, plans to take advantage of Section 179 expensing this year. Despite the recession, the tech company is thriving. The 10-year-old Phoenix company, which provides billing services to customers, has 27 employees, $12 million in annual revenue and a 128 percent growth rate over the past five years.
Haugland plans to buy a high-end printer, which costs between $150,000 to $300,000, and a high-end inserter machine used to collate statements, invoices and other mail. He also plans to open a production center in the Midwest.
“It’s great to get the bonus depreciation,” he says. “Anything that keeps cash in the pocket is a benefit.”
What part of the federal stimulus package do you expect will help you or your company most?
8% Section 179 expensing, bonus depreciation and other tax benefits
2% Loans from the SBA
13% New business from stimulus funds, such as new infrastructure projects
Source: CDW Poll of 361 BizTech readers
Purchase $400,000 in new tech equipment
First-year write-off from Section 179 expensing: $250,000
Bonus first-year depreciation: ($400,000 – $250,000) x 50 percent = $75,000
Regular first-year depreciation, calculated at five years, or 20 percent per year: $75,000 x 20 percent = $15,000
Total first-year deduction: $250,000 + $75,000 + $15,000 = $340,000