Economic Stimulus Package — Time to Act: Now

SOME PUNDITS have called it “window dressing,” and others have termed it a last ditch effort to put a positive spin on the back end of what will become President Bush’s legacy. All politics aside, the Economic Stimulus Act of 2008 (H.R. 5140), which the president signed into law in late February, is intended to pump life into an economy that is bordering on—if not already wallowing in—a recession.

Beginning this month, taxpayers will begin receiving between $300 and $600, depending on marital status, and $300 per child with limits based upon household income. Thus a working married couple with two children and a household income of $80,000 would receive $1,800, as long as they filed a tax return.

From a business standpoint, printers, trade finishers and mail houses that purchase equipment after December 31, 2007, and install it before January 1, 2009, can be eligible for 50 percent bonus depreciation (technically, the depreciation is accelerated) and possibly enhanced IRC Section 179 expensing. On the latter, the limit on capital investment during 2008 that can be expensed was raised from $128,000 to $250,000 for companies that purchased less than $800,000 in capital assets during the year. The cap for expensing dwindles dollar for dollar (pro rata) above the $800,000, to the phase-out maximum of $1,050,000.

Some businesses will be able to use both the 50 percent depreciation and the capital expensing. Purchases such as large presses clearly will be limited because they will exceed the expensing cap, for one, and given the engineering and logistical aspects of ordering and installing a press, the only companies that will reap the accelerated depreciation are those companies that have already contracted with heavy equipment vendors.

However, it might be argued that printing companies weighing the purchase of equipment, large or small, may be swayed into action by the tax incentives offered in the package. Even a press ordered at Drupa 08 faces long odds of being installed by the end of the calendar year, but it stands to reason that manufacturers and suppliers will be keen on offering deals that would enable their customers to leverage the tax benefits.

Mark Nuzzaco, government affairs director at NPES The Association for Suppliers of Printing, Publishing and Converting Technologies, acknowledged that the “placed in service” stipulation forces printing businesses into making decisions on purchases in short order, and leaves large press acquisitions problematic for bonus/accelerated depreciation. Not that it can’t be done, however, but it will make for a challenge.

“We were hoping, when the package was put together, that we could extend the placed in service date into the first quarter of 2009,” he says. “It was all driven by revenue estimates that Congress was looking at in terms of what this package would cost. Even so, it’s certainly better than not having it.”

Nuzzaco sees the third quarter as being the drop dead point for contracting to have heavier equipment placed in service by year’s end, while smaller, off-the-shelf products can be obtained later in the year and still qualify.

“When we saw this stimulus the last time around, in 2003, it was very helpful,” Nuzzaco remarks. “For those people who were in the market (for equipment), it made a big difference in their margins. The window is a little smaller this time, so it’s incumbent on people to take action as soon as possible.”

Stuart Margolis, a CPA serving the printing industry and a principal of the firm MargolisBecker, feels this stimulus effort will have more of an impact than the previous one because a larger number of printers have become more profitable, hence more taxable and in need of relief. With higher profits in general the past two years, he believes the stimulus would have been beneficial before 2008.

Margolis isn’t sure that the benefits will make a huge difference in the overall scheme of business in the printing industry. But he has noticed a major push from people who want to circulate the information.

“Bonus depreciation is a big help not just for small companies, but also for bigger ones that buy a lot of equipment,” he says. “If the bonus depreciation could have been extended another year, it would have made a big difference. The 179 (code) has got a lot of limitations. Most printers who buy a press will spend more than the limitation allows. The average $5 million-a-year printer is spending at least $100,000 (on equipment), if not more.”

Andrew Paparozzi, chief economist for the NAPL, cautions that equipment decisions should not be based on a tax package alone, as tax incentives are short-term and equipment decision implications are long lasting.

“If you were planning on purchasing a piece of equipment anyway, had already done all your due diligence and knew this was the right move for your company, then purchasing in a positive tax environment can save you money,” adds Joe Vincinzino, NAPL senior economist. “However, the tax package at that point is icing on the cake. You would have already determined that this move was right for your company’s growth.”

There is anecdotal evidence that suggests some excitement is being felt in certain printing industry circles as evidenced by an uptick in the number of accelerated press acquisitions. Ray Prince, vice president and senior consultant for operations management at NAPL, has witnessed a surge in interest for purchasing new presses—primarily large sheetfeds, but also some web models.

“I have been called upon to write commissioning specifications, help with contract language and advise on auxiliary equipment that the printer should consider,” Prince says. “All of this equipment would be installed prior to year’s end; in fact, some as soon as two months. In one case, I have been asked to design and specify a complete new web offset printing facility—rush. I haven’t had a request like that for a number of years.

“Did the economic stimulus package spark this? Very possibly,” he notes. “All of the firms are successful and growing, but now there is definite urgency.”

Ronnie Davis, vice president and chief economist for PIA/GATF, believes the stimulus package will provide some aid to the economy in the second half of 2008. Any help provided in a fragile economy is most welcome, he adds.

“PIA/GATF’s economic outlook is that the economy will slow most in the first and second quarter before recovering in the third and fourth quarter,” Davis says. “Printing shipments will show a similar pattern with the election helping out significantly in the third quarter from the increase in direct mail.”

Lisbeth Lyons, director of government affairs for PIA/GATF, urges printers to consult with their tax professionals to see what impact the stimulus package would have on their respective businesses. She says the PIA/GATF advocates making the tax cuts permanent but, with the death tax situation still in limbo and possible sweeping changes coming from the next presidential administration, optimism doesn’t come easily.

“More than anything, it makes the fall elections a really important decision for people who have a position on tax reform policy,” Lyons adds. “(With the elections looming), we’re not going to see any major tax changes or any of these tax relief provisions made permanent this year. This is a year of setup and debate for how things are going to go. With the elections, it’s a pretty divergent path when it comes to policy.” PI

Sample I

COLOR SCANNER
(Total 2008 Purchases Do Not Exceed $800,000)
Example Price (Without Tax Cut): $100,000
Enhanced Sec. 179 Small Business Expensing Provision = $250,000/year (Up to $800,000 of Investment)
Total First-Year Depreciation = $100,000 (100% of New Asset)
Tax Savings = $40,000 (Assuming 40% Effective Tax Rate)
New Effective Price With Tax Cut = $60,000 (a 40% Savings)

Sample II

EIGHT-COLOR, 40˝ WIDE HEATSET WEB PRESS
Example Price (Without Tax Cut): $8 Million
New 50% Bonus First-year Depreciation = $4 Million
Plus Regular Depreciation = $570,000
Total First-Year Depreciation = $4.57 Million (57% of New Asset)
Tax Savings = $1.8 Million (Assuming 40% Effective Tax Rate)
New Effective Price With Tax Cut = $6.2 Million (a 23% Savings)

Sample III

MID-RANGE SADDLESTITCHER
(Total 2008 Purchases Are $900,000)
Example Price (Without Tax Cut): $200,000
Partially Phased Out Sec. 179 Small Business Expensing Provision = $150,000 ($100,000 over $800,000 limit)
New 50% Bonus First-year Depreciation = $25,000
Plus Regular Depreciation = $3,500
Total First-Year Depreciation = $178,500 (89% of New Asset)
Tax Savings = $71,400 (Assuming 40% Effective Tax Rate)
New Effective Price With Tax Cut = $128,600 (a 36% Savings)

Source: NPES Government Affairs