Buying Boost in Mind

By Pete Bach, The Post-Crescent, Appleton, Wis.

Mar. 16–Private taxpayers have gotten most of the attention as the government’s economic stimulus package gains momentum.

But businesses stand to gain as well. Immensely so, in fact. By one estimate, two tax incentives will add up to $44.8 billion in tax relief accelerated all in one year.

The bonus depreciation feature lets businesses write off 50 percent of new plant investment or new equipment they |purchase this year, an immediate form of tax relief. The standard depreciation schedules let firms write off new capital goods in five to seven years.

And the bipartisan bill doubles the amount small businesses can write off their taxes for new investments made this year from $125,000 to $250,000, and increases the number of small businesses eligible for the relief from those making $500,000 to $800,000.

Pros and cons

Marty Finkler, a professor of economics at Lawrence University, believes it’s “wishful thinking,” that the federal rebates for consumers — ranging between $300 and $1,200 depending on personal circumstances -can stimulate spending and prop up the economy.

“A good chunk of that money will get saved and that’s not entirely bad in my view,” he said. “It won’t hurt us (the nation) to increase the savings rate, but the rebates themselves won’t provide sustainable consumption.”

However, the Congress-approved economic stimulus package may yield some benefits to business, Finkler said.

“For those it can benefit, they’ll be better off,” he said. “But the question is how will they pay for (capital improvement)? If they can find the lenders, that’s great.”

Brian Strnad, a shareholder in the tax department at Schenck Business Solutions, Green Bay, expected mid- to large-size business to make liberal use of the one-time measure, but not the smallest of the small businesses.

“That’s because they’re already taking advantage of Section 179,” he said referring to the Internal Revenue Service code that deals with asset depreciation.

There’s a chance the business incentive could be continued after 2008.

“Business should be thinking now as they prepare their budgets,” Strnad said.

Fredrick “Fritz” Merizon, president and general manager of MBM, an office equipment reseller in Grand Chute, said the business tax breaks are similar to those approved by Congress following the events of Sept. 11, 2001, to stimulate economic activity.

“It certainly can help but sometimes tax credits aren’t enough,” Merizon said.

Merizon said it may take time for companies to realize the benefits of the stimulus package.

The depreciation rule, for example, may influence whether or not a company buys or leases equipment.

“Companies may wait until later in the year to make a purchase decision to see if the economy improves,” Merizon said. “Right now we’re not seeing any immediate benefits, but that could change toward the latter part of the year.”

Seizing the opportunity

Baum Machine doubled the space of its Buchanan plant recently in a major expansion, which means it needs more equipment.

“With the expansion we’ve added a lot of capital equipment and I’m sure we will take advantage of the accelerated depreciation,” said Steve Schick, an estimator at the plant. “I’m pretty sure they (the federal government) did that in ’01 and we did take advantage of that.”

Schick said the law will favor firms like Baum that prefer to buy used equipment.

“But anybody that had bought brand new equipment would be fools not to take advantage of that,” he said.

One huge Fox Cities plant is less certain about its plans.

Sweden-based SCA Tissue North America is embarking on a $23 million overhaul of the recycling facility at its Menasha mill.

A company executive was still undecided whether the firm will elect to buy any more equipment ahead of time as it proceeds with plans to put the facility on line in 2009.

“We are aware of the bonus depreciation component and at this time we are still evaluating it to determine if it is something that SCA will utilize,” said Joe Fahley, chief financial officer.

To be eligible to claim bonus depreciation, property generally must be purchased and placed in service during 2008.

But property acquired under a binding written contract entered before January is not entitled to the bonus depreciation.

Retail’s perspective

Retailers are hopeful consumers will spend their rebate checks in their stores.

However, some consumers are in a penny-pinching mode and are not planning to spend the windfall.

“We’re saving it. We’re putting it away,” said Shelley Bodoh of Neenah. “There are too many rainy days coming up.”

She and her husband, Peter, were walking through the Valley Home Builders Association Home Expo in Appleton last weekend and while they were planning on doing some home remodeling, they’ll use money they’ve already saved.

“We pay in cash,” she said. “We save in advance, a dollar at a time.”

Many Americans, like the Bodohs, plan to save the rebates they get from Uncle Sam.

A recent national survey asked consumers what they intended to do with the money. Results of the Feb. 5 to 12 poll of 7,977 adults were split between savers, spenders and bill-payers.

Just more than 40 percent will spend the money, according to the National Retail Federation survey conducted by BIGresearch. Nearly 33 percent will use the checks to pay down debt or pay medical bills. More than 23 percent will save or invest the money.

Spenders will pump nearly $43 billion into the economy immediately, according to NRF estimates.

“While some will splurge on big ticket items, many consumers will use the checks for important day-to-day purchases,” said Phil Rist, vice president of strategy for BIGresearch.

If retailers want to encourage people to stimulate the economy through their cash registers, it appears they’re going to have to nudge them. Some are ready for the challenge, knowing they’ll need to put on some pretty enticing promotions.

“We’re well aware of the stimulus package,” said Paul Kollberg, the Madison-based vice president of marketing for American TV, Appliance and Furniture, which has a store in Grand Chute. “While I can’t speak to specific promotion concepts, I can say we plan on being extremely aggressive in that period.”

Likewise, Gina O’Brien, co-owner of Country Village, a decor store in Grand Chute, is in the planning stages for promotions and special customer perks.

“We’ve talked about it a little bit,” O’Brien said. “We haven’t formalized any plans, but we’ve talked about specials we can do and seminars.”

O’Brien said the checks could help ease the current spell of highly guarded consumer spending.

“They’re not spending thousands of dollars on furniture. They’re getting little things to make their houses more cheery. We’re focusing more on smaller items right now,” she said.

“Come May, what I think we’ll do is focus on more items or larger items. We don’t want to overwhelm consumers. But we’re hoping the economic stimulus package might make them want to redo a whole room.”

Likewise, the biggest furniture and mattress retailer in northeastern Wisconsin is optimistic that people will use the money to get something for the home.

“We’ll definitely be promoting through that time,” said Jim Greene, president of WG&R Furniture. “However I don’t think we’ll do anything specific to try and address the tax issue just because I don’t think, as a retailer, we’ll have much influence over how the consumer decides to spend those dollars.

“I’m optimistic our category will get its share,” he continued. “I just don’t think outside of our normal promoting, that we could do anything more compelling than our normal promotions to try and get a share of those dollars.”

Saving and spending will ultimately both help retailers, said Tracy Mullin, NRF president and chief executive officer.

“Tax rebate checks should have the desired effect of both bolstering the economy in the short term and putting consumers in a better position to spend for the future,” she said.

Maureen Wallenfang and Larry Avila contributed to this report.

What will you do with the money?

A national survey of nearly 8,000 consumers in early February illustrates how people plan to spend their tax rebate checks.

— Purchase something: 40.6 percent

–Pay debt: 28.4 percent

— Save it: 18.7 percent

— Pay medical bills: 4.4 percent

— Invest it: 4.1 percent

— Other: 3.8 percent

Source: BIGresearch

Benefits for businesses

— Small business expensing: The bipartisan plan doubles the amount small businesses can write off their taxes for new investments made in 2008 from $125,000 to $250,000, and increase the number of small business that are eligible for this tax relief for small business making up to $800,000 (from $500,000).

— Bonus depreciation. It provides immediate tax relief for all businesses to invest in new plant and equipment by speeding up bonus depreciation provisions, so that firms can write off 50 percent for investments in 2008.

Source: U.S. Congress

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