No, this was not specifically tailored to any particular industry, but related to the economy as a whole and capital spending.
I've copied some of the analysis below:
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Does Accelerated Depreciation = Accelerated
Capex?
In our year-ahead outlook,
we reiterated our forecast that Corporate America will step up its new business
investments in the second half of ‘04 to take advantage of the accelerated 50%
depreciation allowance passed last May. This would provide companies
significantly larger write-offs for equipment put in place on or before December
31, 2004. This week we will more fully explain the tax benefit extended to
corporations, the impact on aggregate investment spending, and the sectors that
will most likely take advantage of the tax credit. In a nutshell, we believe this
could touch off a late-year pre-Y2K style business spending spree as CFOs
convince management that it is cost-effective to spend part of the ’05 budget in
late 2004. Of course, some of this increased investment spending will be at the
expense of growth in 2005, similar to what happened to 2000 growth.
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What are the Specifics of the Special Depreciation Allowance?
The special bonus depreciation allowance was originally 30% and covered a three-year
period from September 10, 2001 to September 10, 2004; it was passed on
March 6, 2002. However, last May, the depreciation allowance was increased to
50% and the deadline for new purchases extended to the end of 2004 (not
coincidentally, in our view, until after the November elections). Companies can
claim the accelerated depreciation on equipment that has a depreciable life of 20
years or less and is put in place after May 5, 2003, and before January 1, 2005.
The 50% acceleration is a big benefit for companies since it allows them to write-off
a much larger share of the depreciation expense in the first year, which reduces
the profits reported to the IRS and leads to a substantial reduction in their tax
liability. By paying lower taxes to the IRS, companies generate increased after-tax
cash flow in the first year. Here is an example of how the accelerated
depreciation works. A company purchases a piece of equipment with a life span
of 10 years and assuming a straight-line depreciation schedule would typically
deduct 10% of the cost each year for the next 10 years. However, according to the
50% acceleration rule, companies would now be able to deduct (or write-off) 50%
of the cost of the equipment purchased plus another 5% in 2004, for a total of
55%. The remaining 45% of the cost would be spread out throughout the
remaining nine years, on a straight-line accounting basis that would be 5% per
year.
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NIPA Data: Effects on Profits and Spending?
What affect has the accelerated depreciation allowance had on the economy?
How have the tax cuts of 2002 and 2003 affected corporate profits? As mentioned
in the prior section, the provisions allow companies to reduce the profits reported
to the IRS (though not to investors) and lead to a lower tax liability. The Bureau
of Economic Analysis, which calculates GDP and corporate profits, has created a
table showing the combined effects of the Tax Acts of 2002 and 2003 on corporate
profits (see Table 1 on the following page). This table clearly shows that in the
third quarter of 2003, the tax effect of the Act reduced pre-tax corporate profits by
annualized $196.1 billion. The result was that corporate profits grew, on a year-over-
year basis, at a 14.5% rate, not at the 20.0% rate they otherwise would have.
The overall tax liability was reduced substantially, and the net result was that
after-tax profits were up only 13.9% year-on-year, again far below the 20.0% gain
if the Act had not been passed. The trade-off, however, is that by paying lower
taxes, net cash flows should rise more rapidly in the NIPA accounts. The result is
that corporations will purchase new equipment and increase their cash on hand to
use at their discretion. However, as discussed above, after the first year,
depreciation is lower than normal raising corporate tax liabilities.
How much did the Acts affect spending? In the second and third quarters of 2003,
nominal spending on information processing equipment and software rose 14.5%
and 24.9%, respectively. Spending on computers and equipment exploded to
34.6% and 40.5%, while spending on software rose a more modest 10.1% and
18.0%. All these growth rates were far above the growth rates posted by those
sectors since the boom period of 2000. Given the incentive to invest before Act
sunsets, we believe the greatest benefits will accrue in 2004. The result would be
that corporate capital spending would rise in 2004 at the expense of 2005. |
