S&P Credit FAQ: Impact of CapEx Tax Relief on U.S. Companies

by: Research Recap

Standard & Poor’s examines the potential impact of tax relief on new investments in new business equipment such as factory machinery and delivery trucks in a new Credit FAQ: How The Recently Enacted Tax Relief Law Will Affect Corporate Entities.

Selected excerpts:

According to a review of the U.S. corporate sectors we rate, the industries with the highest average reported capital expenditure per dollar of revenue over the past three fiscal years (2007-2009) were Electric Utilities (22%); Integrated Gas (19%); Gaming, Lodging, and Leisure (15%); Infrastructure (13%); Oil and Gas (13%); and Aerospace & Defense/Transportation (10%).

While some future incremental capital spending might be attributed to the temporary incentives in the new law, in our view, the extent to which the change might stimulate demand is difficult to determine. As corporations start using budgeted spending amounts in 2011, uncertainty about the economic recovery persists.

Many capital-intensive industries are still operating below normal utilization levels, and therefore at capacities many consider less than optimal for expansion consideration.

Other factors could also mitigate use of the full depreciation stimulus boost, including the extent to which a company could take advantage of the tax benefit given its recent tax-paying status, and its already planned and budgeted 2011 capital expenditure projects and activities.

Apart from the bonus depreciation provision, we believe that certain industries may also benefit from the tax extenders signed into law, but, because they are “extenders,” the impact may be marginal. For example, financial institutions or corporates with financial arms may benefit from the extension of the Subpart F exception; health care (particularly pharmaceuticals) and technology entities could benefit from the extended research and development credit; and any company with clean energy or related operations could benefit from the clean-fuel related tax credits.