Tech's Bottom Line | Bill Snyder » TAG: IT Spending

November 20, 2008 | Comments: (0)

The hidden tax break for techies is almost gone

TAGS: IT Spending

Time is running out to take advantage of a little-known tax break for tech investments. Come Dec. 31, it's gone.

With Congress and the Treasury Department throwing billions of dollars at banks and maybe auto companies, it was easy to miss a key part of the economic stimulus package that passed earlier this year. It has the catchy name of 168k -- named after the Internal Revenue Code section that applies: 168(k)(2)(g) -- and I'll bet you've never heard of it. But if you're a developer or IT shop in need of new hardware or software, pay attention so you can save some serious money.

[ What technologies can you not afford to cut in the current recession? InfoWorld reveals the top 5 priorities you can't compromise on. ]

What's more, the savings will let you do the kind of upgrades and purchases you might well have postponed because of the terrible business climate. By cutting the cost way down, you can be that much more competitive.

Section 168k of the tax code was originally enacted in 2001 but had expired at the end of 2004 (except for a few special cases). It's now back on the books, but it covers only assets purchased in calendar year 2008. This means you have six more weeks to buy stuff you didn't think you could afford. (There's no way to know if the new Congress will extend it again.)

Here's a link to a copy of the stimulus package; search for "168k" so you can see for yourself without reading through a 120-page law.

In essence, the provision lets you depreciate 50 percent of software and hardware costs in this tax year, says Robert Kish, a vice president of Vitale, Caturano & Co., a technology consultancy. His company, by the way, has its root in the world of accounting, so he's probably a better source on tax matters than most technology consultants.

Normally, you can depreciate only a much smaller percentage each year -- typically 20 percent for computer equipment and software. You then depreciate the remainder of the cost over the appropriate IRS schedule (typically five years for computer equipment and software).

But wait, as they say on late-night TV, there's more. The changes contained in the stimulus package boosted the amount of money you can deduct for capital expenses the year you buy things, known as the Section 179 deduction. Thanks to the 168k provision, the maximum deduction under Section 179 rose for 2008 from $128,000 to $250,000. The net effect is that you can reduce your taxable income by a greater amount this year.

Here's an example of what that means: On Dec. 29, 2008, you buy workstations and software valued at about $400,000. The 168k code provision lets you deduct $250,000 as a Section 179 deduction plus $75,000 in depreciation (50 percent of the remaining amount) for a total of $325,000 off the top from this year's income, and then split the remaining $75,000 over the next four years. (Under the soon-to-return old rules, you could deduct just $182,400 the first year and have to spread the rest over the following four years.)

Of course, there are some complexities involved that will adjust the specific numbers in each case, but you get the idea. Your tax adviser can give you the specifics in your situation -- remember, I'm not an accountant or tax adviser.

Depending on your needs, you can save even more money by leasing, instead of buying. But there's a nuisance here: it has to be a capital lease, notes Kish. That's because standard leases, like software maintenance fees, are considered operating expenses and thus don't get the benefit of the act.

However, there is a downside to a capital lease: You're essentially locked into the agreement for five years, which is the normal depreciation period. If, for example, you like to refresh hardware every three years, a capital lease is not a good idea, says Kish.

But all things being equal, the 168k provision could let you loosen those purse strings a bit. These days, that's good for all of us.

I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.

Posted by Bill Snyder on November 20, 2008 03:00 AM

January 17, 2008 | Comments: (0)

IT may get hit as consumer spending slows

TAGS: IT Spending, Tech Stocks

The American consumer has ridden to the rescue of corporate revenues for years. Buoyed by highly valued homes that served as virtual ATM machines, consumers indulged their appetite for goods and services, particularly consumer electronics and computer-related devices.

That's starting to change. As the economy slows, there are signs that the pace of consumer spending is not only slowing, but actually shrinking for the first time in years.

Bad news for consumer-oriented tech companies? Of course. But don't think that enterprise IT providers are necessarily exempt. Spending ripples through the economy; dollars spent at restaurants may ultimately result in the purchases of inventory management software from Oracle, or servers from Sun for use at corporate headquarters.

American Express, for example, is an enormous consumer of enterprise software, hardware, and services, but with late payments on the rise, the giant credit card company could well dial back IT spending.

Signs of retrenchment
Earlier this week, Bear Stearns analyst Andy Neff lowered price targets and earnings estimates for a number of hardware, data storage, and imaging companies he tracks, saying, "Recent economic data has highlighted weakness in [the] consumer [sector], which often spreads to the enterprise [sector]." Other analysts cut estimates for online retailers, including Amazon.com.

Making matters a lot worse from Wall Street's perspective was Intel's anemic fourth-quarter earnings report and a downright disappointing outlook for the first quarter.

But there was even more bad news this week.

Consider the economic news released Tuesday by the departments of Labor and Commerce. Wholesale inflation last year shot up by the largest amount in 26 years, while retailers suffered their worst December shopping season in five years. And in a third report, the federal government said that inventories held by businesses rose 0.4 percent in November, reflecting big increases in stockpiles held by manufacturers and wholesalers.

That news, coupled with more bleeding by Citigroup, prompted an ugly sell-off on Wall Street, completely erasing the gains of Monday's "Big Blue rally," even before Intel's bombshell. That pushed the market even further into negative territory.

Even the wealthy are cutting back
ChangeWave Research, which does periodic polls, found, in its latest survey of 4,600 people employed in business, medicine, and technology, that consumers are planning to spend less this year than in the past. What's more, the poll revealed that belt-tightening is occurring across all income levels -- even among respondents who earn more than $150,000 per year.

In the November survey, 21 percent of those with annual incomes over $150,000 said they were planning to cut spending in the coming year; by January that number had increased to 33 percent, the most significant backward jump in the history of the poll, said Paul Carton, research director for ChangeWave.

Europe may be next
Meanwhile, there are some signs that the weakness in the United States and Japan is spreading to Western Europe, said Bear Stearns' Neff.

Indeed, European retail sales fell the most in at least 10 years in November as rising food and energy costs sapped consumer confidence. Retail sales declined 1.4 percent in November from a year ago, the biggest drop since at least 1997, according to wire service reports from Europe.

That's unsettling. Sales to Europe and Asia have been key to strong performances by the largest technology vendors, many of whom derive more than 50 percent of revenue from foreign sales. IBM, for example, delivered a robust quarterly report this week, built in part on strong foreign sales, which in turn were boosted by the weak dollar.

A few bright spots
To be sure, there are bright spots.

It's possible that fears of a European slowdown are exaggerated. Intel CEO Paul Otellini said during a post-earnings conference call with analysts that European sales were up 22 percent sequentially. So far, he says, Intel has not seen significant signs of slowdown in Europe.

Apple, for one, bucked the holiday ebb tide with strong computer sales, although Wall Street was not happy with iPhone sales that topped 4 million units, well below the most bullish expectations.

It's still not certain that we are headed for a recession, but the raft of bad consumer news is very worrisome, and it is not at all clear where IT investors and employees will find a safe harbor.

I welcome your comments, tips, and suggestions. Reach me at bill_snyder@infoworld.com.

Posted by Bill Snyder on January 17, 2008 03:00 AM

December 06, 2007 | Comments: (0)

Analysts predict IT squeeze

TAGS: Ariba, IT Spending, Oracle, Tech Stocks

All IT surveys aren't created equal. I give Goldman Sachs more weight than most of its rivals, including JMP Securities (a boutique investment bank), and some of the lesser-known research shops. But when Goldman, JMP, and now ChangeWave, (one of the aforementioned second-tier research firms) all get on the same page, you have to pay attention.

Surveys by the three organizations indicate that the credit crunch and fears of a possible recession have convinced IT execs to rein in spending in 2008, with the software sector taking a significant hit.

In the most recent survey, JMP analyst Patrick Walravens downgraded Oracle after finding 61 percent of the 38 companies he surveyed expect their software spending to be flat or down in 2008. And in a rather unsettling aside, he said, "We think Oracle can find ways to save money to protect its earnings per share. We expect to see some reductions in the sales force as well as other cost-saving measures."

Granted, 38 companies, even if carefully selected, comprise not much of a sample. But JMP has been conducting the survey for seven years, and according to Walravens, the result is the worst since 2001 "and is similar to the result in May 2003, which marked the beginning of a two- to three-year choppy period for Oracle's business."

The JMP survey has done a decent job predicting Oracle's results.

In the 10 months following the 2001 survey, Oracle's stock price dropped from $15 to $8. After the May 2003 survey, Oracle's stock traded up and down as it made the May 2003 quarter, missed the August 2003 quarter, made the November quarter, and then missed the February 2004 quarter. "We would not be surprised to see this type of uneven performance in our software universe until the U.S. economy regains its footing," the analyst wrote.

Walravens also downgraded Ariba for similar reasons. And while shares of Oracle slipped just a bit, Ariba fell more than 5 percent following his note. (By the way, Cowen analyst Peter Goldmacher had a different take on Ariba, saying that the company would actually benefit from a modest economic downturn, since it sells itself as a resource to help companies manage procurement spending.)

The JMP survey comes a few weeks after Goldman Sachs sampled a much larger group of companies and found similar, downbeat results. "We are reducing the estimates of most of our covered companies, focusing on pure-plays that could be harmed as customers seek to purchase 'good enough' substitutes from larger vendors, as well as vendors who sell 'big ticket' items that could be delayed in a slower spending environment," analyst Sarah Friar wrote in the report.

On a more positive note, Friar said that companies selling SaaS (software as a service) would likely do better. "The ability to quickly and easily turn on new applications with a significantly lower initial cost of ownership makes SaaS an attractive offering for small and midsized businesses, significantly expanding the market for software applications."

ChangeWave sampled more than 1,900 companies and said, "Projected IT spending growth looks anemic for the coming quarter compared to the robust seasonal increases we normally see at this time of year. Simply put, this is unusually bad visibility for IT spending."

I have a quarrel with that conclusion. I've often seen spending slow down in the first quarter, following a fourth-quarter budget flush. But the fact that sentiment in so many companies is more negative than usual for this time of year gives ChangeWave's conclusion some weight.

We'll get a change to hear real numbers from Oracle on Dec. 19. The results for the quarter will likely be good, but Wall Street will be very interested in the company's outlook for the next three months.

Rate cut could change the game
As I write this post on Wednesday, the market is making a strong
upward move, after two down days. The reason is two-fold. There's
more and more confidence on Wall Street that the Federal Reserve will
cut interest rates. Moreover, there is some good economic news
buoying the market.

As I wrote last week, the potential rate cut is dominating the thinking of investors right now. The market is counting on a cut of at least one-quarter of a point and that news is essentially priced into stocks at this point. A half-point cut would obviously be welcomed with a rally, while a stand-pat stance would makes things ugly in a big hurry.

Stay tuned.

I welcome your comments, tips, and suggestions. Reach me at bill.snyder@sbcglobal.net.

Posted by Bill Snyder on December 6, 2007 03:00 AM