How the fiscal cliff affects IT

By Colin Neagle, Network World |  IT Management

"If you have a company that's solely involved in government contracting and therefore their business is cut off, they're going to try to branch out into other forms of business, at least in the near term, which will squeeze out other companies," he says. "So even if companies aren't directly involved in government contracting, there's going to be some squeezing out within the industry because of that void of funds."

Vendors looking to compete in a more crowded market will need to show more concrete return on investment, Davis says. Customers will also be more fiscally tight, and will therefore be less likely to invest in products that cannot prove "hard-dollar ROI," he says.

Small business expensing and bonus first-year depreciation

Previously, the "small business expensing" provision allowed small businesses to write off up to $139,000 in expenses on items that could be classified as assets. Those that exceeded that limit were afforded the "bonus first-year deprecation," which allowed 100% depreciation of the remaining amount for that same year. The intention was to provide relief so startups and small businesses could launch and grow without drowning in the initial costs.

However, as part of the tax increases, these provisions are undergoing some changes. The small business expensing provision will be reduced from its $139,000 allowance to $25,000 in 2013. On top of that, the bonus first-year depreciation was reduced to 50% in 2012, and will be dissolved completely in 2013.

Beyond the impact on internal expenses, the changes to these tax provisions could hamper sales for IT vendors whose customers were previously able to write off their purchases, Whitman says.

"This is an incentive to purchase the IT systems that may be a cost break," he says. "Otherwise, they might not have done [the purchase] after making a cost analysis of the tax costs."

Whitman added that it's possible the removal of these tax breaks could turn off potential IT customers.

Another approach private companies take in a tough economy is restructuring their pricing models, Davis says. To retain customers that may be affected by changes to tax provisions, vendors can reduce their prices or offer products or services on a subscription basis, Davis says.

"Hopefully the reason someone is buying your technology is not just for the tax break," he says. "So what you may do to make it easier is, as a vendor, make it a little bit better of a price, lower your price a bit to offset that tax break the customer is no longer getting."


Originally published on Network World |  Click here to read the original story.
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