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Tax Breaks May Boost Small Business Spending

Friday, 14 Jan 2011 | 10:46 AM ET

They are feeling optimistic it will be a good spring at Olson's Greenhouses in Raynham, Mass. Sales picked up markedly last fall and stayed strong through holidays—like green shoots pointing to the potential for real traction during their busy season which starts in May.

Recovery sign
Recovery sign

"Christmas was up almost 18 percent. That was really a great feeling," says Clive Olson, who took over the family-owned business five years ago.

It has given him enough confidence to consider buying a pair of much-needed new trucks this year.

"We typically buy two at a time and replace them every four years, but we've just been maintaining," Olson explains. With the downturn, they put off new purchases, leasing trucks as needed. But he feels having their own branded trucks is important.

"Showing up with a new truck, with your lettering, just shows your viability."

Beyond strong sales, Olson says he's persuaded to buy the trucks this year to take advantage of the 2011 bonus depreciation rules, included in the $858 billion tax package passed by Congress in December.

"This is a really big sweetener." -Chief Economist, Moody's Analytics, Mark Zandi

Businesses will be able to depreciate 100 percent of the cost of capital goods on their 2011 taxes, for equipment bought and placed in service between September 8, 2010 and December 31, 2011. That's up from 50 percent accelerated depreciation in 2010, and applies to property that is depreciated over 20 years or less.

"That's a real big sweetener," says Moody's Analytics' chief economist Mark Zandi, who believes this year's bonus depreciation will spur companies that have been on the fence about new equipment to loosen their purse strings. "I think it will get them to invest much more aggressively and actually go out and hire more people."

Silver Moon Bakery owner Judith Norell isn't so sure. She just bought a new mixer, which will qualify for the 100 percent depreciation, but doesn't see the tax incentive prompting her to make additional new purchases.

Big Break for Small Business
New depreciation rules in the tax bill are designed to boost small business optimism and hiring, with CNBC's Bertha Coombs.

"We replace when we need to," she says of the recent equipment purchase. Judging from her customers' spending habits, she feels others are thinking the same way.

"There is really not an expansionist sense at all. There is a very cautious sense of how people spend money."

Small business owners surveyed by the National Federation of Independent Businesses in December continued to express caution about capital expenditures, even as the tax package was passed in Washington.

"There are couple of pieces of equipment that we're interested in, but it will also depend on how the market responds," says Phoenix Stamping's Brandyn Chapman, a second-generation manufacturer of metal parts in Atlanta, Ga. He won't rush to make a new purchase to get the tax break, and expects his customers won't, either.

"I would never invest in a piece of equipment just for the tax credit," says NFIB member Joe Olivo. The president of family-owned Perfect Printing in Moorestown, N.J. says his 45-person firm still hasn't seen enough business growth to justify a big purchase now.

"The thing is, with the tax credits, you have to have profits in order to expand. And that's one of the things we've been struggling with the last two years. The profits simply aren't there."

Lack of profit growth is one reason NFIB chief economist Bill Dunkelberg predicts the economic boost from bonus depreciation will be mild and short-lived, when it comes to smaller firms. "It's really like cash for clunkers. It will pull sales from the future, which is good for today, but subtracts from tomorrow."

Small Business Outlook
Joe Olivo, owner of Perfect Printing near Philadelphia, tells CNBC's Bertha Coombs he is optimistic about prospects for small business, job creation and the 2011 economy.

But Mark Zandi of Moody's Analytics points out the 2009 cash for clunkers tax break for car buyers helped give auto manufacturers a much-needed boost at a critical time.

He estimates that taken all together, the measures included in the $858 billion tax package could boost U.S. GDP by as much as one percent in 2011. Even if some measures rob 2012 growth, Zandi argues it will have been worth it.

"I think on the other end of it, we're going to be in a much better place, and the economy is going to be expanding at a rate fast enough that it will continue to move forward and we won't have the crash in activity that people fear."

At Olson's Greenhouses, they are hoping for a sunny spring and milder economic winds will help boost sales enough to justify buying those new trucks.

"We're pretty excited about spring coming up," says Clive Olson. This year, he thinks he's not alone. "I think people are sick of hearing all the negativity."

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