Stimulus tax credit buys robots and tractors

NEW YORK (CNNMoney.com) -- Rick Heflin recently bought a $110,000 assembly robot for his computer electronics company -- and the stimulus bill helped pay for it.

Heflin's Custom Electronics Company, based in Gaithersburg, Md., took advantage of a tax break called "Section 179" that lets small businesses treat qualifying property purchases as expenses and deduct them from their taxable income.

To motivate companies to go spend money on equipment, the government turbocharged the deduction in a 2008 stimulus bill and extended the enhancements through 2009 in last year's Recovery Act. Congress is on the verge of renewing the tax break again for 2010.

"My accountant saw that we were doing pretty good and she said, 'You are either going to have to pay taxes or go buy a piece of equipment, so which do you want to do?'" said Heflin, whose 17-employee company manufactures circuit boards. "I needed the equipment, so that is what we did."

His new pick-and-place robot can position 3,000 to 4,000 pieces per hour on those boards, significantly speeding up manufacturing and boosting his firm's capacity. It's the second year in a row Heflin has made use of the Section 179 write-off, which he estimates has saved his business at least $40,000.

"The vendor made me a very attractive deal, and with Section 179, it was a no-brainer," Heflin said. "You don't usually get your cake and eat it too, but I guess I did in that case."

A double-barreled stimulus: Section 179 truly is a small-business tax break: It begins phasing out when a business spends more than $800,000 annually on equipment. Beyond that point, companies have to depreciate their assets over time.

The immediate write-off helps small companies keep more cash free for other purposes.

"There is a big advantage to having that cash flow right away," says Abe Schneier, a senior manager at the American Institute of Certified Public Accountants. "Even in the best of times, it is hard for many small businesses to borrow money for any sizeable investment."

"Small businesses need all the help they can get," agreed Marc Albaum, a CPA in New York City. "We need more people employed, so we need more profitable small businesses."

That's where Section 179 brings a second-tier benefit: Companies can only take advantage of the tax break when they spend money. Their purchases generate sales for other businesses.

Thomas Implement, a farming equipment retailer in Altamont, Kan., has done an extra $2 million worth of sales over the last two years thanks to the tax break, manager Terry Harrell estimates. Farmers looking to decrease their tax liability come in and buy big-ticket items like tractors and combines, which run $200,000 to $400,000 a pop.

"Section 179 has been a very important part of our business in the agriculture industry," Harrell said. "It is the fuel behind purchasing."

Direct Capital, an equipment leasing and financing company in of Portsmouth, N.H., ran a promotion this fall playing off Section 179: The company paid a cash reward of $179 for every $10,000 of customer financing.

"There's real value in the benefits that small businesses can gain from this tax provision," said Steve Lankler, vice president of marketing. Direct Capital ended up paying out $12,000 in cash rewards as part of the program.

Section 179 is a longstanding part of the U.S. tax code, but the 2008 and 2009 stimulus bills doubled the deduction's cap, allowing up to $250,000 of qualifying purchases to be written off each year. The government also kicked in "bonus depreciation": Businesses that spent more than $250,000 can immediately write off 50% of the overage as an immediate depreciation. The rest can be depreciated as usual, over several years.

A wide variety of assets qualify for the tax break. The IRS maintains a complete list, but the most common qualifying purchases include computers, software, office machines and furniture, manufacturing equipment and vehicles that weigh more than 6,000 pounds. (The weight limit is intended to limit the tax break to industrial vehicles, but because SUVs qualify, Section 179 is best known as the "Hummer loophole.")

Business owners are likely to get one more year of beefed-up deductions. Policymakers from both parties back the idea, and it's included in a $15 billion jobs bill that recently passed the House and will soon be taken up by the Senate. Advocates, citing the measure's popularity, say it's a slam-dunk: "I don't think Congress really has a choice as to whether to extend it," said CPA Marc Albaum.

Thomas Implement's Harrell sees it as the best way to spark what businesses need most right now: sales. Extending the credit through 2010 "would be a bonus," he said. "That would be a big boost to the economy."