Weak economy means some firms can’t use tax break

NEW YORK - When Congress passed the economic stimulus package back in February, the measure contained a huge tax break for small businesses, dramatically increasing a popular deduction on equipment purchases.

Now, with a faltering economy, many companies are likely finding they have to forgo the deduction because they can’t afford to buy or finance a vehicle or computer gear.

“People aren’t pulling the trigger on large capital purchases,” said Jeffrey Berdahl, a certified public accountant with Berdahl & Co. in Center Valley, Pa. “Businesses don’t have good cash flow or cash reserves, so they’re probably having to postpone purchases.”

The tax break came in the form of near doubling of what’s called the Section 179 deduction, which rose to $250,000 from $128,000 for 2008. The deduction, named for a provision of the Internal Revenue Code, is aimed at small businesses and allows them to deduct up-front the cost of certain kinds of equipment rather than depreciating the purchases over a period of years.

At this point in the year, accountants are usually urging clients to take advantage of the deduction, which can be used for items like computers, office furniture, manufacturing equipment and cars or trucks. But they also counsel that the decision to buy equipment should always be made as part of an overall business strategy.

“Look at 179 and depreciations and capital outlays as economics first and tax second,” said Mark Toolan, a CPA in Exton, Pa. “You’re not going to go out and buy it (equipment) because you save on taxes; you’re going to go out and buy it because you need it.”

Shira Weiss, who owns a Teaneck, N.J.-based public relations firm, has scaled back her buying plans.

“Because of the economy, I’m trying to stick with the things I need,” said Weiss, CEO of Weiss Media Group Inc. She’ll buy just a scanner and a fax machine for now, and is putting off an iPod purchase. “We’re being extra careful,” SHE said.

It’s not yet known if Congress will approve an extension of the increase in the deduction for 2009, but even if lawmakers decide not to, businesses should still be able to deduct purchases up to around $130,000, itself a sizable amount.

“If you don’t have the taxable income in 2008 and you’re looking ahead and you feel things are looking up in 2009, there’s no reason in the world why you can’t wait,” Toolan said.

You might think that prices on equipment look good now. But with some economists forecasting a weak economy through next year, it’s very likely that you can still get a good deal after Jan. 1.