Debunking Obama’s Business Tax Break

Obama is touting a new business deduction that could save companies up to $200 billion dollars.  The tax break will allow businesses to expense capital property and equipment 100% right away instead of depreciating them up to 39 years.  However, this plan will have limited effects until the fourth quarter of 2011.  Here is why:

Just like the Healthcare credit, this business deduction will only reach a very limited range of companies.  While Obama is heralding it as a small business tax break, small businesses already can expense equipment and some capital improvements through Section 179 deductions.  In fact, they can expense up to $250,000 in 2010.  Most small businesses will never purchase that much new equipment in one year.  So already this break for 2010 is only for medium to large businesses.  In 2011, this business tax break will act simply as an extension after Obama let’s the Section 179 provision expire.

What Section 179 does not cover is the physical building and most capital improvements to the building itself.  That is where this tax break may actually be effective for small businesses.  However, Obama runs into another snag here that most tax professionals and analysts miss.  In order to take losses in your business, you have to have basis.  In other words, you can only take out of your company what you put into it or make in the process of carrying on business.  If you borrow $100,000 from the bank and put it into your company, and then spend it all without making any money, you cannot deduct that $100,000 until you have built up basis in your company.

Most building property and significant improvements are purchased through outside financing on the small business scale.  This means that most small businesses will not be able to take the losses from this tax deduction until they are able to build up basis in the company.  In fact, companies who choose to take this deduction and then take distributions out of the company in excess of their basis will face double taxation.

The final nail in the coffin for this tax break for 2010 is that many tax advisers are telling business owners to put off capital investments until 2011 when the Bush tax cuts expire and rates go up.  Many small businesses make capital purchases and take advantage of 179 expensing in the fourth quarter as part of their year end tax planning.  This year, many businesses are planning on putting those purchases off until next year when the deduction can save them an additional 3-8.4% in taxes.  By putting off property purchases until 2011 when Obama let’s taxes go up, small businesses can save tens of thousands of dollars.

In that sense, this tax break may be a good thing.  As businesses are losing tens of thousands with the expiring Bush tax cuts, maybe this will help save some jobs in 2011.  Don’t expect it to solve anything this year.

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