Skip Links

How the fiscal cliff affects IT

The so-called fiscal cliff has the potential to send the U.S. economy into a tailspin. Here are the specific changes that could hit the IT industry.

By , Network World
December 06, 2012 10:48 AM ET

Page 2 of 3

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."

While he acknowledges that this could mean smaller margins for some vendors, Davis says a drop in revenue may be inevitable for some. However, changes in pricing structure could make for a much brighter future than an outright loss of customers.

"I think what it means is it will just be a valley, not a cliff, for those companies, Davis says. "If we talk about a fiscal cliff, it might end up being a fiscal valley for a lot of the vendors."

IT training and the workforce

Sequestration could put funding for federal IT training and educational programs at risk. For an IT industry that's currently suffering from a skills gap in its workforce, Whitman says sequestration could make it more difficult for companies that are hiring to find adequate candidates.

"One of the big things was the skills gap, where there were hundreds of thousands of IT jobs open but they were not filling those IT jobs because there weren't people with the proper training," Whitman says. "I think with the sequestration and the decrease in education funding or training funding, I think that's another important aspect of the problems of sequestration for the IT industry."

Our Commenting Policies
Latest News
rssRss Feed
View more Latest News