Expensing Capital Spending: Potentially Good News for INTC and MU
Expensing capital spending
According to the originally proposed framework for tax reform from Congress, companies would be allowed to count much their capital investments, excluding structures, as expenses for the next five years. This would likely reduce the taxable income of capital-intensive companies like semiconductor companies (SMH).
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But the Senate’s version of the bill extended this provision even further. Under the Senate’s proposal, companies would be allowed to expense 100% of their capital spending for the next five years. After that, they would be allowed to expense 80%, 60%, 40%, and 20% of their capital spending over the next four years. Hence, this provision would extend to 2026.
This provision was praised by economists who believe that it would support strong growth, though the government would likely have to bear heavy costs.
Impact on semiconductor companies
Semiconductor companies—especially the ones who run their own fabrication facilities—have huge capital spending expenses because they have to upgrade their technology every few years. Building a new fabrication facility generally costs at least $3 billion.
Intel (INTC) and Micron Technology (MU) are among the top capital spenders in the US semiconductor space. Intel has been investing in upgrading its facilities to the 10 nm (nanometer) process node, which Micron has been building a facility to build its 3D XPoint memory and upgrade its old memory plants to 3D technology.
The capital expensing provision of the Senate’s tax reform bill would likely give these companies a higher incentive for their high capital spending. Higher capital spending would likely benefit semiconductor manufacturing equipment suppliers like Applied Materials (AMAT) and KLA-Tencor (KLAC).