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Manufacturers see gains from tax break for capital outlays

“Our capital spending will be 5% to 10% higher because of this,” adding perhaps $30 million to the $300 million Navistar has planned, says Daniel Ustian, chairman and CEO of the Warrenville-based truck manufacturer. But he’s even more interested in what the tax break will do for customers. “Over the next 12 months, if this works, the entire economy will be better, and there will be more sales.”

Mr. Ustian and other Chicago-area execs say that because the economy already seems to be accelerating, capital expensing should have more impact than previous attempts to boost spending through faster depreciation. Navistar expects truck sales to be up 25% to 30% this year; the 100% writeoff should ensure that they hit the higher end of that range, he says.

“When you combine a potential increase in manufacturing with something like this, it’s huge,” says Terry Iverson, president of Iverson & Co., a Des Plaines machine tool distributor. “People are holding equipment together with bubble gum, paper clips and Super Glue. Machine tools are expensive, so this could help dramatically.”

There’s a long history of government efforts to spur capital spending through investment tax credits and tinkering with depreciation schedules. In recent years, smaller firms were allowed to expense up to $500,000 in capital expenditures. And the 2009 stimulus package created a 50% first-year writeoff for certain firms. But never before has depreciation of machinery, equipment and software been totally eliminated for all companies, regardless of size.

Calling the tax break the “largest temporary investment incentive for business in American history,” White House economist Jason Furman says hiring should rise if business spends an additional $50 billion to $100 billion on capital expenditures this year, as the White House and outside economists expect, or roughly 5% to 10% higher than had been forecast.

Mr. Obama first highlighted capital expensing in a speech on the economy on Sept. 8. Hence, the law enacted in mid- December applies retroactively to machinery and equipment installed after that date. In 2012, the writeoff drops back to 50%, though that’s still more advantageous than spreading deductions for the entire cost of investments over several years.

Capital spending was increasing in 2010 before the year-end tax package, spurred by the 50% writeoff under the stimulus bill. “Probably 30% to 40% of our orders in the last quarter have been driven by that,” says Tim Doran, vice-president and co-owner of Tristate Machinery Inc., a machine-tool distributor in Wheeling. “We’ve seen an absolute dam burst.”

Many companies, however, waited to see whether the entire $858-billion tax cut package would get through Congress before the end of the year.

“We had a list of equipment we had to buy, waiting for this impasse to get resolved on taxes,” says Ron Bullock, chairman and owner of Bison Gear & Engineering Corp. The St. Charles-based gear manufacturer plans to expand its research facilities and hire three or four more engineers and scientists, he adds. “This will allow us to take some of the money we have been paying in taxes and devote that to training activities.”

Navistar’s Mr. Ustian notes that at a recent meeting of the Business Roundtable, a big business group in the nation’s capital, some execs wondered whether one-year expensing would merely accelerate capital investments planned for 2012 or 2013, providing no long-term boost to the economy at all.

“My view is, if we really do think the economy will improve, this will help us along the way until economy gets better,” Mr. Ustian says.

From Crain’s Chicago Business, Jan. 3, 2011