How Obama's tax credit helps, hurts IT spending

The big question: Do you hold off on IT spending until Congress acts on the credit?

WASHINGTON -- Among the proposals President Barack Obama made this week to boost the U.S. economy is one that will allow businesses to write off all of the investment they do in 2011. But there's a lot of uncertainty ahead for IT managers interested in this tax break.

In a speech Wednesday, Obama was specific about when he wants the tax break to apply -- "in 2011," he said. There was initial expectation that the White House would ask Congress to approve a tax break that applied through 2011, with a retroactive start date to this month.

Even if the timeframe for the tax proposal was clear, there is still ambiguity about whether Congress will approve it, particularly in the weeks leading up to the mid-term election.

But the fact that the president has pitched this tax break may be enough to prompt some IT managers to take a second look at some of their purchase plans, said Joseph Pucciarelli, program director of technology financial and executive strategies at IDC.

An announcement of a major tax incentive for 2011 capital investment will cause a reduction in discretionary IT spending, equipment and system upgrades for the balance of 2010, said Pucciarelli.

The tax proposal "will definitely cause borderline projects to be deferred, if the CFO believes that this proposal has a possibility of being implemented," Pucciarelli said.

If the investment write-off is approved, Pucciarelli estimates that it could increase IT spending anywhere between 7 and 12%. IT hardware purchases are forecasted this year by IDC to reach $135 billion.

The tax break, as proposed, means a business can write off capital purchases in the first year instead of over several years.

The threat that spending could be deferred in expectation of a tax break is "why you got to make it retroactive," said Robert Atkinson, president of the Information Technology and Innovation Foundation, a tech think-tank.

Another question is whether the tax break stimulates new demand for IT products, or prompts businesses to accelerate purchases. The problem is similar to the $8,000 housing tax credit for first-time homebuyers, which helped boost home sales until the program ended earlier this year.

"The primary driver for increasing IT spending is economic growth," said Frank Scavo, president of research firm Computer Economics. "No organization is going to invest in new systems or new equipment unless economic conditions justify it."

But for an organization that is "on the edge of considering new systems, a more generous tax credit will make the ROI case easier," Scavo said. "But generally, a more broad-based rebound in IT spending will need to wait for a more robust recovery."

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at  @DCgov or subscribe to Patrick's RSS feed . His e-mail address is pthibodeau@computerworld.com.

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