What Surprise Did the American Tax Relief Act Have for Caterpillar?

Manufacturers like Caterpillar (NYSE:CAT) and Paccar (NASDAQ:PCAR) could see benefits from the American Taxpayer Relief Act, which was recently signed into law. Primarily, the debate regarding the bill’s provisions has focused on the changes it will have on individual income and capital gains tax rates, but the impending changes will also significantly revise favorable business tax regulations.

For equipment put into service in 2012, the bill added a one-year extension of the accelerated depreciation program that permits companies to deduct up to 50 percent of the cost of capital equipment, which includes items used to manufacture products, provide services, or deliver merchandise, from their federal taxes.

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Throughout much of the last decade, Congress has implemented favorable tax laws to encourage companies to invest in the expansion or modernization of their businesses by buying new equipment. Bonus depreciation measures were first written into the American tax code in 2002, with the Job Creation and Worker Assistance Act. This bill allowed for an accelerated first-year depreciation deduction equal to 30 percent of the qualifying equipment’s cost. The deduction was increased to 50 percent in 2003, and the definition of qualifying property was expanded in 2004. Provisions were once again extended and expanded by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

These provisions were scheduled to expire on December 31, 2012, at which time the regulations regarding deductions on machinery, office equipment and other depreciable assets would have reverted to the modified accelerated cost recovery system (MACRS), significantly reducing the first-year depreciation deductions. But on Wednesday, President Obama put his signature on a bill that will keep the system in place.

In the case of Caterpillar, who has much higher depreciation costs than its competitors, the revised provisions will provide aid to its balance sheet as the company faces a sales and revenue outlook that “reflects global economic conditions”  weaker than previously expected, which has contributed to lowered order rates as a result.

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