Obama Expands, Extends Bonus Depreciation on Equipment Purchases

by Christopher Moraff September 2010
At the beginning of September, President Barack Obama unveiled an initiative expanding to 100% the amount that businesses may immediately write off on capital investments. Business leaders applauded the move to broaden bonus depreciation; but some economists said while his heart is in the right place, the President’s proposal may not have the impact he anticipates.

President Barack ObamaPresident Obama unveiled an initiative that will allow businesses to deduct the full value of equipment purchases from their taxes through 2011. In a speech on the economy during a Sept. 8 visit to Cleveland, the President said he would expand “bonus depreciation” from 50% to 100%, and extend the benefit through 2011.

“I’m proposing that all American businesses should be allowed to write off all the investment they do in 2011,” the President said. “This will help small businesses upgrade their plants and equipment, and will encourage large corporations to get off the sidelines and start putting their profits to work…”

Bonus depreciation allows businesses to recover the costs of certain capital expenditures more quickly than under ordinary tax depreciation schedules. As enacted under the stimulus plan by the Bush administration, bonus depreciation currently allows businesses to immediately deduct half of the cost of many new investments in their business. The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, extended bonus depreciation through calendar year 2009. Following his State of the Union address last January, President Obama extended the benefit for another year.

The new proposal is among a set of targeted initiatives for renewing and expanding the country’s transportation infrastructure including the establishment of an Infrastructure Bank, the rebuilding of 150,000 miles of roads; the construction and maintenance of 4,000 miles of rail; and the rehabilitation of 150 miles of runway.

The plan will include a $50 billion upfront infrastructure investment and a permanent extension of research and development tax credits for businesses. It builds upon the infrastructure investments the President has already made through the Recovery Act, includes principles the President put forth during the campaign, and emphasizes American competitiveness and innovation, the White House said in a press statement highlighting the event.

The extension of bonus depreciation, which is expected to cost the government an estimated $200 billion in tax revenues over two years, has received accolades from business groups including the Equipment Leasing & Finance Association, which has long advocated for the expansion of the tax benefit.

“ELFA enthusiastically supports the use of capital formation tax incentives that focus on the need to invest in plants and equipment as a key component of economic growth and competitiveness,” said ELFA president William G. Sutton, commenting on the Obama tax proposals. “The Administration’s proposal to allow for the full deduction of qualified capital investments through 2011 is a step in the right direction.”

But some analysts, including economists from Goldman Sachs, have said the plan, though good in theory, could generate pushback from some in the business community since the costs of the proposal, according to the President, will be partially offset by raising corporate tax revenues and closing certain loopholes. In any case, says Joel Naroff, president and founder of Naroff Economic Advisors, it will be difficult for cash-strapped businesses to take advantage of the incentive as long as access to capital remains tight and confidence low.

“This is going to help, there is no question about it, but it’s not clear how much because what’s contracting the economy right now is a positive outlook about the future,” said Naroff. “So, it’s the right policy in that it’s looking toward the future and trying to get business to look toward the future, but the president can’t control private sector outlook. CEOs are going to have their own outlook and while this may generate more investment, how much is unclear.

“The critical problem now is to get businesses thinking longer term and acting longer term and looking towards the future instead of worrying about the present,” added Naroff. “And that’s what this policy is all about.”

Christopher Moraff is associate editor of the Monitor.

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