While small businesses have continued to invest in capital spending over the past 18 months, there has been a definite pull-back in light of the economy.
“Generally, businesses are focused on weathering the economic crisis and looking for ways to save cash flow,” says Chris VanStraten, senior manager with Baker Tilly Virchow Krause LLP in Appleton. “Some businesses, however, are taking this opportunity to expand if they have a capital surplus, as lending rates are favorable for good credit.”
Other area consultants have noticed this trend as well.
“Small businesses have definitely decreased their amount of spending on capital improvements over the past 18 months,” says Jason Feltz, CPA and tax senior manager with Clinton Gunderson LLP in Oshkosh. “However, with the availability of the Section 179 expensing opportunities and bonus depreciation, small businesses have continued to upgrade their fixed assets although it has been on a smaller scale.”
“A number of businesses are not using their cash to invest in fixed assets,” says Mary Jo Parkins, CPA and shareholder with Schenck SC in Oshkosh. “Businesses are worried about their cash flow and want to make sure they have the liquidity they need to cover day-to-day expenses in case sales don’t increase in the future. The most common purchase I have seen this year is new vehicles because of the deals that are available in the market.”
Capital spending is the acquisition of fixed assets or adding to the value of an existing fixed asset that have a measurable life exceeding the taxable year, the consultants say. These may include machinery and equipment, computer equipment and software, furniture and fixtures, vehicles, landscaping, and real property construction.
“During the past 18 months, most small businesses have been investing in plant equipment, computer equipment and automobiles,” says Feltz.
“Capital spending generally occurs when a business makes an investment in its operations in the form of purchasing a piece of equipment for continuation, growth or expansion,” says VanStraten. “Currently, small businesses are investing in products which make them more efficient to operate or produces short- and long-term savings.”
Tax incentives
The tax incentive related to bonus depreciation was set to expire on Dec. 31, but the Section 179 expensing opportunity will continue to exist for the 2010 tax year and beyond, Feltz says.
“The dollar amounts related to Section 179 are set to be lower for 2010; however many small business will continue to be able to take advantage of these opportunities,” he says. “There continues to be many limitations on who can take Section 179 expensing opportunities and when they can take the deduction, so you should always discuss with your accountant before making any purchases. There also continue to be state tax credit programs available to qualified businesses.”
“Even though some of the tax incentives are gone at the end of 2009, some still exist,” says Parkins. “As of right now, small businesses will be allowed to expense qualified fixed asset purchases up to $125,000 in 2010 under [Internal Revenue Code] Section 179.”
“Lower tax rates in general would help,” adds VanStraten. “Companies should invest where it makes sense for their business from an economic standpoint. A pure tax credit vs. a deduction for capital spending may help.”
New products
Where would be the best areas to resume capital spending?
Parkins says the types of new investments will vary depending on the business’ industry and specific needs. “Technology equipment and software are important in any industry,” she says. “Once a business gets behind in technology, it can be hard to catch up.”
“Small businesses should look at upgrading their accounting software package if they have not done so recently,” says Feltz. “Off-the-shelf software packages now can handle point-of-sale and inventory tracking, tracking of order changes, managing inventory costs, tracking workers in the field, dispatching employees, handling payroll, etc. Many of the products have a quick return on their investment.”
Generally, improved technology investments are always coming to the market, and small companies should be looking for any kind of competitive advantage, VanStraten says.
“Some examples would be software that allows them to track customer experiences, handheld digital devices that allow them to be easier to contact or respond to a need, or a new security system for protecting their investments,” he says.