New tax law could unleash capital expenditures

by Bernard Shire
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The news media focus on the Tax Relief Act of 2010, crafted as a compromise between President Barak Obama and Republican members of Congress who took control of the House of Representatives this month, has mostly focused on continuing the Bush tax cuts for everyone, rich or otherwise, as well as a payroll tax cut for individual wage earners in 2011.

This cut reduces employee Social Security taxes from 6.2 percent to 4.2 percent, while keeping employers’ share the same. A great deal of news coverage has also been on the increased estate tax relief, including exemptions and a lower rate, which will actually be helpful to many small business owners, including small and very small meat and poultry plants. But this exemption is guaranteed only through the end of 2012.

What hasn’t been covered by the general news media very much is what’s been called “Stimulus 2 for Business”, including a 100 percent deduction of capital expenditures for business, which is a doubling of the 50 percent deduction rate in effect during the past three years. The goal of the 50 percent deduction in capital gains taxes for businesses the past few years was to provide an incentive for companies, and at the same time to stimulate the economy caught in a recession, by accelerating capital purchases. So the doubling of the capital expenditure deduction was to provide even more of an incentive for companies to invest in equipment and other capital purchases. The increase to 100 percent means no capital gains taxes will need to be paid during the coming year.

If companies take advantage of the 100 percent tax deduction, it would certainly be a boost to the meat and poultry slaughtering and processing industry, with the idea industry will be able to move ahead to buy new machinery and equipment, as well as making certain real estate leasehold improvements. This 100 percent deduction in capital gains is also retroactive, and applies to new assets placed in service after Sept. 8, 2009.

This new deduction could be a huge windfall for meat and poultry industry suppliers who sell processing equipment and other machinery to meat and poultry processing plants. With plants able to take advantage of not having to pay capital gains on new purchases, suppliers might see an expanded market and be able to sell large amounts of equipment and machinery, including sausage-making equipment, sausage linkers, formers, skinning and trimming equipment, curing and marinating injectors, stunners, plucking equipment, evisceration, deboning, further processing equipment and other machinery used by meat and poultry slaughterers and processors.

Wait and see
Whether poultry and meat processors will take advantage of this tax benefit remains to be seen. Since the Tax Relief Act was just enacted last month, it may be too early to tell. George Melnykovich, senior advisor with the Food Processors Suppliers Association who chairs the Meat Industry Suppliers Alliance, one of FPSA’s industry councils, spoke to a number of the meat council members. Their opinion is to this point, there has not been a deliberate increase in investment due to this incentive. One supplier, Shawn Nicholas, a spokesman with Kansas City, Kan.-based Baader-Johnson, says, “If our customer has the capital to spend, they are receiving the benefit of this incentive. However, we don’t see companies freeing up capital in order to take advantage of this tax incentive.”

Tom Hoffman, vice president of sales and marketing with Beaver Dam, Wisc.-based MEPACO, says business among processing equipment customers remains steady, but there has been no uptick in sales yet from the 2010 TRA. Einar Einarsson, president of Lenexa, Kan.-based Marel Food Systems agrees that no discernable sales increase can be attributed to the tax initiative. But Tom Kittle, president of Handtmann, Buffalo Grove, Ill., says the tax incentive at times tips customers over the edge to purchasing instead of waiting. He thinks it’s viewed more as an extra bonus than the a driver in purchasing decisions.

Even though the increase in the capital gains deduction from 50 percent to 100 percent is not having an immediate impact in machinery and equipment purchases, that could change as meat and poultry plants move into the new year. It will also depend on what happens to the economy, in general, during the year. With the Tax Relief Act of 2010 signed by President Obama and on the books, although just at the very end of 2010, it will be interesting to watch what happens, including the effects of this legislation on business as we move further into 2011.
 
Bernard Shire is M&P’s Washington correspondent, a contributing editor and a feature writer based in Lancaster, Pa. Shire also works as a food safety consultant and writer for Shire & Associates LLC.
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