FRAMINGHAM 7 FEBRUARY 2011 - A so-called 100% bonus depreciation tax benefit approved by the U.S. Congress in December may encourage IT managers to buy new equipment before the tax break expires at the end of this year.
The tax benefit, part of Congress' tax-cut bill, was made retroactive to Sept. 8, the day President Barack Obama pitched the idea as a quick economic stimulus.
Greg Rosica, a tax partner at Ernst & Young LLP, said it normally takes up to five years to realize the full tax benefits from depreciation on new equipment, such as servers. But the 100% bonus depreciation allows a company to take the entire benefit in the first year.
The amount of the tax benefit depends on the type of business and its tax rate. For instance, a business that pays the top corporate tax rate of 35% and spends $100,000 on new equipment can reduce its tax bill in the current year by $35,000, Rosica said.
There's no cap on the amount of equipment that can be depreciated, but it must be new.
Frank Scavo, president of research firm Computer Economics Inc., said the tax change will affect the timing of IT purchases. "Buyers who are looking out 18 months now may move acquisitions into 2011 to take advantage of the accelerated depreciation," he said.
The tax benefit's relatively short window "could create a mini-boom in new equipment purchases, perhaps even [leading to] some shortages of key components," said Scavo.
The flip side of this benefit may be a fall-off in new purchases in 2012, he said. "This is the problem with trying to fine-tune tax treatment; there are almost always unintended consequences," said Scavo.
Howard Hammer, a principal at accounting firm Fiske & Co., said the tax benefit is "going to have a tremendous effect" on buying. "Medium and large corporations have been stockpiling cash for quite a while, and I think now they are going to jump on it," he said.
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