Accelerated Depreciation Isn’t the Cure to Small Business’s Problems

As part of an election year effort to show that he’s friendly to small business, President Obama has been claiming recently that he:

“. . .has signed in to law 18 tax cuts that directly help small businesses [including] …. extended accelerated bonus depreciation for two million businesses.”

Accelerated depreciation allows immediate expensing of investment costs. By increasing near term tax deductions, the White House explains, small business owners get to keep more of their income.

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Small business advocate, Dorothy Coleman, Vice President for tax and domestic economic policy with the National Association of Manufacturers, agrees, saying depreciation tax breaks:

“Clearly lower the tax costs for investments made by smaller companies.”

But policies like accelerated depreciation are doing little to get small business owners into the President’s camp.

A Manta poll conducted in the beginning of August has 61 percent of small company owners supporting Mitt Romney and only 26 percent supporting the Barack Obama. Moreover, the same poll reveals that 54 percent of small business owners believe that the Republican party is the biggest supporter of small business as compared to only 19 percent who think it’s the Democrats.

While small business owners, no doubt, favor the Republicans for many reasons, one is surely the fact that the President’s policies help few small business owners.

Consider Accelerated Depreciation

The National Federation of Independent Businesses (NFIB) surveys have persistently shown that small business owners believe that weak demand for their products and services is biggest problem they face.

With revenue weak since the start of the Great Recession, few small business owners making capital investments to expand. And if your business isn’t making capital investments, being able to write off their value immediately does little for you.

Moreover, Internal Revenue Service (IRS) data shows that sole proprietorships (which make up 72 percent of all small businesses) in very few industries have much depreciation. In 2009, the most recent year of data availability, the depreciation deduction averaged only 6.8 percent of net income for sole proprietorships with net income. In four out of five small businesses operate in industries in which the average depreciation deduction was less than 10 percent of net income.

If You Don’t Have Much Depreciation Expense

Accelerating it doesn’t do much for you.

By the President’s own admission, accelerated bonus depreciation only benefits only 2 million small businesses. With the IRS reporting 31.6 million business tax returns filed in 2008, that means only a little over 6 percent of small businesses benefited from this tax cut.

That’s just not enough small business owners to sway the polling data.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.