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Friday, November 5, 2010

Expensing of Business Assets - New Treasury Report

Economic stimulus provisions of the past few years have included bonus depreciation and higher expensing amounts under IRC Section 179.

President Obama has suggested that broader expensing can provide additional stimulus by reducing the cost of capital for all businesses. In September 2010, President Obama released a proposal to "jump start private investment and job creation" by allowing full expensing of qualified investments through the end of 2011. He also noted that this would be the "largest temporary investment incentive in American history." (White House Blog, 9/8/10)

On October 29, 2010, the Treasury Department released an 18-page report, The Case for Temporary 100 Percent Expensing: Encouraging Business to Expand Now By Lowering the Cost of Investment, to further explain and justify the President's proposal. The report states that full expensing will "lower the effective tax rate on income derived from business investments, and thereby encourage additional demand for capital goods."

The report also notes the added benefit of a temporary rather than a permanent provision, namely the incentive to accelerate investment. Expensing also equalizes the effective tax rates on different types of eligible assets regardless of useful life or the MACRS recovery period.
Treasury also notes advantages of expensing of qualified assets outside of the IRC Section 179 expensing regime. That is, the expensing proposal has no limit based on the dollar amount of assets placed in service during the year and no limit based on current year income.

Whether broad-based, temporary expensing will take the place of the temporary 50% bonus depreciation depends on finding revenue offsets, whether Congress also finds that additional stimulus legislation is needed, and how the proposal ranks among other congressional tax priorities.

Over the years, both full and partial asset expensing have been suggested as part of major tax reform as well as an approach for reducing the effective corporate tax rate. So, I think the report may open the door to continued discussions not only on economic recovery approaches, but also on fundamental tax reform.

What do you think?


Marija Mirkovic said...

This provision would primarily benefit manufacturing businesses suggesting that the tax law is not fair and equitable because it favors industries whose business relies on heavy use of equipment. Generous tax breaks may influence businesses to invest in equipment that they wouldn’t purchase if the tax incentives were not available which further suggests that tax law is not neutral because it influences taxpayers behavior to engage in certain transactions or activities.

The government could help fragile economy buy allocating its scarce resources to programs that would generate long-term benefits, instead of stimulating economy through temporary increase in spending and consumption. If sufficient resources are available, a more fair and equitable solution would be to lower rates for everyone and eliminate preferential tax provisions available only to a portion of the taxpayers.

Unknown said...

President Obama's write-off suggestion is a kind of accelerated depreciation to the first year.Using an accelerated depreciation method opposed the straight-line method would result in a shifting of the company’s income.The more depreciation expense in the asset’s earlier years of life creates a lower income resulting in less for the company to be taxed on at first. In the later years the depreciation of the asset would be lower which would result in a higher income and with that comes higher taxation on it. President Obama's write-off of capital investment spent in year 1 would be beneficial to those companies that believe they will have either a flat or decreasing rate of future taxation.Instead for the companies those believe that their tax rate will go up in the future the suggestion will not be that attractive. Those companies may anticipate higher tax rate in the future as a result of the large deficits. Also, they may anticipate their income will go up in the future and they will be in a higher tax bracket or have other cause for a higher effective rate in the future. In either case, the companies would want to “save the tax benefit” of depreciation for a later time to better match up with their anticipated tax liability.
The definition and implication of accelerated depreciation can be found at