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Business Capital: The tax stimulus package provides powerful incentives to invest

Small to medium-sized businesses have reason to cheer the U.S. Economic Stimulus legislation and to look for ways to build their business at a time when others are pulling back.

Many sectors are doing well and many are not

THE GOOD:    If you are a farmer in Iowa, an energy company in Houston, a premium winery, a technology company in Silicon Valley, a specialty health care company or a major exporter, times are good.

THE BAD: If your business is a Wall Street commercial bank or investment bank, anything to do with residential construction or one of many consumer sectors, then times are bad, money is tight for you and there is a recession.

What can new equipment do for your business?

1. It can increase revenue.

2. It can reduce costs.

3. It can build your brand, image or franchise.

4. It can open new markets.

 Money will make money

While corporate pocketbooks and business credit may be tightening right now, there are still opportunities for the companies with healthy balance sheets and positive outlooks. If you have good uses for your capital, and investment could raise revenue or reduce expenses, then spending money will make money. Lenders like Warren Capital have capital for you to grow with, and one example is the Wine Industry.

Wineries are optimistic

“Wineries are planning to make substantial investments in all areas of production this year,” according to the year-end Wine Business Monthly 2008 Winery Equipment Survey. “With wineries allocating capital for everything from tanks to bottling, almost no one seems to be slowing down. Wine is selling, and despite the three-year runaway Euro exchange rate and rising cost of stainless steel, wineries must buy more equipment to grow. Wineries of all sizes are optimistic leading into the 2008 season.”

 How the tax stimulus package will help the economy and your business

The recently enacted tax stimulus legislation gives American business dramatic incentives to create and build new jobs. Both small and medium business will benefit because the new tax incentives are sizeable and far-reaching. Companies that are planning to invest in office equipment, production equipment, vehicles, machinery and the like, but are undecided about timing, are given very attractive incentives to do it in 2008.

The legislation helps businesses in two ways. It gives all companies 50% Bonus Depreciation in the first year on new equipment that would normally be depreciated over many years, and it increases to $250,000 the limit on Section 179 depreciation expense that small businesses can deduct from annual income, with a total cap of $800,000. Section 179 can include “used” equipment as long as it is new to the acquiring business. The company can then in turn borrow the money from an equipment lender, buy the equipment, take the tax deduction in 2008 and continue to pay for it over the remaining 3 to 5 years.

Cash flow is very important to small businesses and getting a large tax benefit like this stimulus package allows them to make decisions that they would normally have to delay. In other words, the immediate deductions are like the government paying part of your purchase, and it makes 2008 a great time to make capital investments.

What is interesting and very beneficial to small businesses is how the immediate write-off plus the accelerated bonus depreciation creates a massive tax write-off in 2008, which directly helps cash flow. For example, a small business purchases $700,000 of capital equipment:



Equipment Cost:    $700,000

Less: Sec. 179    ($250,000)

Balance:    $450,000



Less: 50% Bonus Dep.    ($225,000)

Balance:    $225,000



Less: Regular 1st yr Dep.    ($45,000)

Remaining Balance:    $180,000



Total Day 1 Depreciation:    $520,000



Equals 74.3% write-off of purchase cost in 2008  



These tax provisions are not “one size fits all,” and there are some limitations on some businesses and certain equipment. It is important to review these aspects with your tax professional before finalizing plans.

 There are still benefits for a company that cannot utilize these tax benefits

If a company cannot utilize the tax benefits immediately, then utilizing a tax or operating lease is a very attractive alternative since it can “sell” the tax benefits to the lessor in return for a much lower interest rate. For example, if the rate on a loan was 6.75%, the rate with new tax benefits under a lease would be 5.5%. This is a major difference and makes all kinds of sense for the client who can’t use the depreciation and extra write-offs.

If new equipment can provide revenue, reduce labor cost or benefit your business, it’s a great time to grow.

• • •

W. Clayton Stephens is the founder of Warren Capital Corporation (WCC) (1984) and presently serves as the President and CEO. Prior to founding WCC, Mr. Stephens worked with Wheel-abrator Frye, Inc. (1972 to 1984) as Corporate Vice President, Treasurer and President of the finance subsidiary; Vice President, Finance of Wheelabrator International, Inc.; and President of the Energy Systems division. His last position at Wheelabrator Frye was President and CEO of Trailmobile Finance Company.

From 1969 to 1972, Mr. Stephens was a Corporate Vice President of Genway Corporation. Mr. Stephens started his career in the credit and financial analysis division of Chase Manhattan Bank then advanced to Second Vice President in commercial lending. A graduate of the University of Notre Dame with a BA degree in Economics, Mr. Stephens also holds an MBA in Finance from Stanford University. He is a former Director of Fisher Scientific International, Inc. (2002-2006 - now Thermo Fisher Scientific), Chairman of Fisher’s Audit Committee and also a Limited Partner of Wood, Warren & Co., an investment banking firm. For two terms, he was Chairman of the Lessors Committee of the United Association of Equipment Lessors (UAEL) and a lecturer on equipment finance and asset-based lending topics. 

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