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Monday | 05 November, 2012 | 11:52 am

A taxing issue

By Lynn Stanley

Section 179 offers fabricators key advantages for equipment purchases in 2012

November 2012 - As Congress stands poised at the edge of the “fiscal cliff,” many wait to see the outcome of the election and what will happen in the next 60 days to tax incentives like Section 179. The tax incentive offers manufacturers who purchase and install capital equipment in 2012 several advantages. Manufacturers can deduct from their taxable income the first $139,000 spent on new and used equipment and off-the-shelf software. The deduction remains available on qualified equipment placed in service in 2012 up to $560,000 before beginning to phase out on a dollar for dollar basis. Manufacturers are eligible for a bonus depreciation deduction of 50 percent of the cost on the purchase of qualified equipment placed in service in 2012. The bonus depreciation however, only extends to new equipment. Bonus depreciation also is available to businesses with net operating losses in 2012 but Section 179 cannot be used to create an NOL.

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Contributing to the sales mix

According to a Nov. 2010 U.S. International Trade Commission Report, U.S. exports of goods and services support approximately 10 million jobs. Small and medium-sized enterprises (SME) account for about 40 percent of export-supported jobs in the U.S.

“SMEs are the engine behind the U.S. economy and the primary source of jobs for Americans,” says Nick Yaksich, vice-president of government and industry relations for Association of Equipment Manufacturers. “Large companies have the resources to respond to growing demand in countries like Brazil and China and they have the capacity to build overseas. SMEs also have ramped up export activity. Incentives like Section 179 help to spur manufacturing and promote exporting. The tax incentive is not a panacea, but it can contribute to the sales mix. For manufacturers looking to position themselves for upcoming opportunities or upgrade aging equipment, the incentive offers some advantages. You definitely have to consider it.”

Software included

With its inclusion of software, the tax incentive package recognizes the continuing trend to integrate electronics into smart equipment solutions. Over the last seven years order data show that software, electronics and other automation elements make up about 20 to 35 percent of the growth in production machinery orders. These elements include the integration of automation components like material handling, robotics, quality checking systems and other ancillary equipment being used to make machines more efficient, says Pat Mcgibbon, vice-president of strategic information and research for the Association For Manufacturing Technology.

“The integration of software and engineering into equipment packages are important elements to providing a manufacturer with a solution that can improve throughput and lower labor costs,” he says. “This tax incentive is a great tool for SMEs. Job shops account for 35 percent of our members; add in SMEs and that percentage is probably more than 70 percent. SMEs also produce the majority of subcomponents being sourced by OEMs who are moving away from fabricating individual components to manufacturing whole assemblies. It would be a crying shame if Section 179 becomes a casualty of Congress over the next 120 days.”

The role of electronics and software also is claiming a larger role in the design and manufacture of the commercial vehicle market.

“We’re seeing a significantly higher use of software and electronics packages integrated into both on and off-highway heavy duty vehicles,” says Tim Krause, president and COO of the Heavy Duty Manufacturers Association. “In addition, these packages are finding their way into components like HD diesel engines, which are no longer strictly mechanical systems. New emissions regulations require very exact controls and sensing to comply with clean air requirements on particulates and NOx. 

“On and off-highway safety is another growing issue where software and electronics packages are taking center stage,” Krause continues. “Passive safety systems are being designed into HD vehicles through smart electronics and software; such as electronic roll and stability control systems and other advanced concepts such as sensor-equipped throttle pedals able to sense reduced pressure and sound an audible alarm to alert a driver that may be nodding off. Manufacturers producing these systems are complying with new regulations and laws developed to improve air quality, increase safety and reduce accidents. In our business, due to high costs, remanufactured components and systems are available. Having a tax incentive that applies to both new and remanufactured components is helpful for suppliers in these markets.”

Still time to purchase

As manufacturers head into 4th quarter many machine builders say there is still time to take advantage of Section 179’s benefits. “It might be a challenge to commission and receive a highly-engineered or custom machine before the end of the year, but there are a lot of manufacturers with a wide range of machines in stock that can support a fabricator with delivery and set up requirements to take advantage of Section 179 and bonus depreciation benefits,” says Mcgibbon.

Yaksich adds that it makes sense for manufacturers to look at how they might benefit from Section 179 yet this year because there’s a lot of uncertainty about what will happen in 2013. “Legislatively Congress will have to make some decisions,” he says. “The sooner Congress can establish some certainty about not just the tax incentive but programs like the Highway bill which also impacts fabricators, the quicker the industry will stabilize.” MM

 

 

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