NEW YORK- Investors are heading into a quarter that will likely favor small- and mid-cap stocks as corporate profits rise and businesses rush to take advantage of a tax break designed to give a lift to small manufacturers. Companies have an incentive in the fourth quarter to take advantage of the tax break, known as bonus depreciation. It allows companies to write off more than usual of the price they pay for assets such as equipment, trucks and even racehorses. The stimulus will end in 2005 as the tax law changes, and that could put a damper on economic activity and slow corporate profit growth, Wall Street experts said. Shares of major manufacturers won't reap any benefits from the tax break because the impact on their profits would be minimal. But their small- and mid-sized counterparts should benefit, said Howard Silverblatt, equity market analyst for Standard & Poor's. Companies that are supplying equipment and these depreciated items cumulatively will feel something ... They will get a (boost) from the fourth quarter, but it is going to hurt later on," Silverblatt said. Faster sales of equipment induced by the tax break will lead to weaker demand next year and likely slow sales and profits for the companies that benefited, he said.

FASTER TAX WRITE-OFF: Bonus depreciation allows a company to write off an extra amount of a capital asset that it buys in the first year. The company can depreciate 50 percent of the value of assets, thereby lowering its taxes and giving a lift to profits. Even thoroughbred horses bought by farms for racing qualify for bonus depreciation. But the tax break expires at the end of the year and the previous, less generous standard depreciation rules go back into effect.  SOME COMPANIES HESITATE: Some financial experts said up to now businesses have been hesitant about investing in equipment and using the tax break.  Uncertainty about the economy and possible attacks against the United States have made companies reluctant to spend, said Sidney Blum, director at financial advisory firm Leone & Associates in Buffalo Grove, Illinois.

"You would rather not spend the money and have it available in reserve, even though you are giving up some tax benefits," he said. Business spending on equipment has begun to pick up after a lull and typically grows late in the year, said Bill Zadrozny, chief executive of Siemens Financial Services U.S., the Siemens AG (SIEGn) subsidiary that helps to finance equipment purchases. "I'm not sure bonus depreciation is driving any manic behavior now -- not yet. Over the next month it could possibly change," he said.  But other experts said this and other tax breaks have helped the economy recover from the Sept. 11, 2001, attacks and the subsequent recession. Without the tax breaks, "we would have encountered even greater deceleration of growth and greater deceleration of corporate profits," said Chan of JPMorgan Fleming Asset Management. Chan foresees a rush of spending in the fourth quarter that will boost business investment. Increased capital spending can lead to more jobs, which the economy badly needs, he said. The latest Labor Department figures on Friday showed weaker-than-expected jobs growth in September. Chan forecasts that the return on investment for stocks will come in at about 7 percent this year, using the S&P 500 companies and excluding dividends. With them, stocks will return nearly 9 percent. Next year, the return on investment will probably slip to 5 percent to 6 percent, excluding dividends, he said. As for bonus depreciation's impact on stocks, Chan said, "I think it will come to bat for us in the fourth quarter." -Reuters/K. Bary