Small Business Tax Cuts and Tech Expenditures

By Patricia Fusco
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Congress just made it a little easier for small businesses to invest in growing their businesses. One of the provisions of the newly passed tax cut package is a quadrupling of the expensing limit for small businesses to purchase capital equipment.

The tax cut increases the amount of investment in equipment that a small business can write off in the first year from $25,000 to $100,000. The tax cut also allows small businesses to depreciate 50 percent of the cost in the first year that the new equipment is put in service — as long as it's before Jan. 1, 2005.

The tax break disappears after 2004, thanks to one of several "sunset" clauses in the bill that were included to keep the overall 10-year cost of the tax cut package within the $350 billion limit set by the Senate. As a result, there is somewhat of a sense of urgency when considering what the tax break could mean your small business.

While mainstream media might have you believing that small business owners are scurrying about buying extravagant, gas-guzzling SUVs as the result of increasing expensing limits, many small business operators are thinking about making a greater return on their investment over the long haul — analysts anticipate that 30 percent of small businesses will use the tax break to invest in growing their computing capabilities.

One small business that intends to use the tax break to grow its business through new technology is Roseville, Calif.-based Shari's Berries. Founded in 1989, Shari's Berries is a gourmet candy maker whose chocolate-dipped strawberries could make anyone's mouth water. Lowell Feil, Shari's Berries vice president of operations, explained the computing challenges behind running a successful online business.

"During a regular business day we may process 300 to 400 orders over our system," Feil said. "But during Christmas, Valentine's and Mother's Day we have to handle a huge growth spurt — we have to process as much as 1,200 orders a day."

Feil said that the small business will utilize the tax cut this year to upgrade the infrastructure behind Shari's Berries.

"We going to do a systems upgrade on our existing AS/400 system to get a bigger box and add disk capacity," Feil said. "Without the limit increase on capital expenditures we would not be able to expand our infrastructure."

IBM, like other high-tech companies, appreciates the idea growing a small business through technology. Judy Smolski, IBM small and medium business vice president of marketing, said there's four reasons why small businesses should consider using the tax break to invest in new technologies.

"Technology is one of the most significant areas that small business owners can realize quantifiable returns on their investments," Smolski said. "Depending on your business goals — acquiring new customers, increasing customer loyalty, increasing employee productivity or operating more efficiently — the tax break represents a new opportunity for small businesses to grow their business. "

Another area of growth for small businesses relies on their ability to harvest the power of the Internet. A 2001 survey of small businesses prepared by Verizon revealed that nearly 70 percent of small businesses don't have websites — this is similar to survey results from 1999 — the first year the telecommunications company completed the survey. Smolski said a small business owner's ability to gain capital could dramatically change these statistics.

"An e-commerce initiative is one way smaller businesses can compete with bigger companies," Smolski said. "The tax cut will help small business gain access to capital and be the engine behind our economic recovery."

Dena Battle, National Federation of Independent Business manager of legislative affairs, said the small business tax break was one of its members top priorities.

"The $25,000 expenditure limit was just too small," Battle said. "Many of our members said they reached the limit in the first three months of the year."

Battle said that where small businesses with increase their spending remains to be seen.

"It's just a little too soon to tell how small businesses will utilize the tax break," Battle said. "A lot of members have said they're buying office equipment and furniture — it really depends on their specific business needs."

Small business operators generally don't incur new expenses just to take advantage of a tax deduction. They need to feel fairly confident that a new expenditure will generate more sales and profits. Once you've determined that a new technology expenditure is important to the future of your business, it's important to stop by your accountant's office to make sure you're taking full credit where the new tax credits are due.

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This article was originally published on June 12, 2003
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