Continued bonus depreciation or tax reform?

One of the 57 federal tax provisions that expired at the end of 2013 was 50% bonus depreciation. That has been a temporary provision for several years, primarily aimed at helping economic recovery. It's also been a generous provision (it was even 100% for a few years). With 50% bonus depreciation, a business claims depreciation on new equipment in the year it is placed in service equal to 50% of the cost + normal depreciation on the balance. If the company was also eligible for Section 179 expensing, it would first claim $500,000 and then take 50% of the balance and then normal depreciation on the balance.

Temporary tax provisions are often renewed well after they expire. These temporary provisions all "cost" money because they result in reduced tax collections. To be extended in a revenue neutral bill, Congress has to find "offsets" - other tax increases or spending cuts.

Some of these temporary provisions, such as bonus depreciation, are for economic stimulus.  Isn't the economic downturn over?  Some of the provisions are to serve a specific purpose, such as encouraging hiring of certain workers or buying certain energy efficient equipment.  Do we have data on whether these provisions met their goals?

How does possible extension tie with calls for comprehensive tax reform where tax rates are lowered and the base broadened?  One easy way to help broaden the base would be to let the temporary provisions that expire remain expired!  After all, it is difficult enough to remove or cut back permanent tax preferences; it's easy to let the expired ones stay that way.

So far as bonus depreciation, I think any effort to extend it calls into question just how serious elected officials are to lower the corporate tax rate or engage in comprehensive tax reform.  One significant way to pay for a lower corporate tax rate would be to slow down depreciation.  And that has been proposed - including in the past few weeks by Senator Baucus, Chair of the Senate Finance Committee. His tax reform discussion draft on cost recovery calls for moving from MACRS to asset pools for depreciation, extending the life of buildings from 39 to 43 years and extending the life of intangibles from 15 to 20 years (among other changes). In 2011, the Joint Committee on Taxation suggested that about 70% of the cost to lower the corporate rate from 35% to 28% would come from converting from MACRS to the slower Alternative Depreciation System (ADS)  That's because other changes, such as repeal of LIFO, don't generate enough dollars to fund any significant drop in the corporate rate.

So, let's see what happens with any discussion of extending any of the provisions that expired in December 2013, particularly the 50% bonus deprecation and shorter life for certain assets such as race horses and leasehold improvements.  If they get extended, should we just drop the thought that we'll see revenue neutral comprehensive tax reform with lowered rates in the near future?

What do you think?

Democrats call for bipartisan tax reform effort

On October 24, 2013, the Democrats of the House Ways and Means Committee sent a letter to Chairman Dave Camp calling for a bipartisan effort to move forward on tax reform. They point out the need and the challenge, noting that it will likely require $5 trillion of revenue to repeal the AMT and lower the corporate and individual tax rates to 25%.  

I think this is a positive move!  I also think that Chairman Camp and Senate Finance Chairman Baucus are committed to moving on comprehensive tax reform. It think we'll see proposals from one or both committees in the next few months.  As to how specific they will be with respect to how the tax base is broadened in order to lower rates in a revenue neutral manner is the big question.  

The text of the letter can be found here. Here is the key excerpt:

"Comprehensive tax reform must be the product of a bipartisan process.  The Tax Reform Working Groups set the Committee off to a good start, and began the process of Republican and Democratic Members on the Committee digging into the substance of current law.  The next step is to discuss tax reform legislation together.

"We acknowledge that our approaches to tax reform have significant differences.  We believe that everyone should pay their fair share of taxes.  For example, the Joint Committee on Taxation estimates that lowering the top individual and corporate tax rates to 25 percent and eliminating the alternative minimum tax, as proposed in the House-passed budget, would cost more than $5 trillion.  In setting any rate, it is vital to determine what effective policies should be reflected in our tax code. 

"The last three weeks have made it clear that the only path for passage of comprehensive legislation in the House is one that garners a governing majority through Republican and Democratic votes.  In order to make the difficult task of tax reform a reality, it is essential to sit down and earnestly discuss tax policies that will strengthen American families and enhance U.S. competitiveness."

What do you think?

Seven Signs We'll Have Tax Reform in 2014

Did you hear that the chairs of the congressional tax committees were in Minneapolis on July 8 talking about tax reform? It's part of their tax reform "road trip." That's one of my seven signs that tax reform will happen in 2014.  For the other reasons, please see my short article in teh AICPA Tax Insider - "What are the signs that tax reform will occur during this Congress?" (7/11/13).

Here is their website with more information - here.

What do you think?

Time to justify your favored tax breaks - if you can

On June 27, 2013, Senator Baucus, Chair of the Senate Finance Committee and Senator Hatch, Ranking Member of the committee issued a call to everyone asking them to submit justification for keeping any tax break they believe should be in the federal tax law. They refer to this as a "blank slate" approach. That is, assume that none of the 200+ special tax breaks ("tax expenditures") are in the tax law. If you believe any should be there, send them the reasons why. House Ways and Means Committee Chairman Camp called this idea "welcome news" (6/27/13 press release).

The senators refer to the Joint Committee on Taxation tax expenditure report to define what a tax expenditure is. The Joint Committee on Taxation does not count rules tied to the basic design of a type of tax as tax expenditures. For example, the JCT states in its February 2013 report:

"Under the Joint Committee staff methodology, the normal structure of the individual income tax includes the following major components: one personal exemption for each taxpayer and one for each dependent, the standard deduction, the existing tax rate schedule, and deductions for investment and employee business expenses." (page 3)

The JCT also notes that the carryover of net operating losses is a normal part of an income tax. (page 8)

I can't think of any deduction, exclusion, credit or special rate that is crucial to our tax system. The provision that likely saves me the most tax dollars is the exclusion for employer-provided health insurance.  But, I should be paying income and payroll taxes on that benefit - it is income and something that not all individual filers get benefit of.  This is also the largest tax expenditure - over $110 billion per year. Removal of this special tax rule ought to allow for a drop in the individual tax rates. Some will argue that people will drop their employer-provided health insurance if it becomes taxable. I doubt it because the tax you pay on it is likely to still be far less than if you get your own insurance and pay for 100% of its cost. And, this change might also lead to a drop in insurance costs when the policy holders actually know the cost of that coverage.

The research tax credit is an incentive to conduct research in the US which is a good idea. And it also helps cover some of the spillover benefit others get from a company's research. So there is some justification for this credit even in the blank slate approach to tax reform, but it needs to be weighed against a lower tax rate and a simpler system. A simpler credit is likely still a good idea, as is expensing R&D rather than capitalizing and amortizing it (and simpler, and it is just a timing difference).

Ok - I'd also argue for allowing small businesses, even those with inventory to use the cash method rather than accrual because it is easier for them. This is just a timing item, so really not a significant cost. Also, the term "tax expenditure" is not viewed by everyone the same way. The JCT treats use of the cash method of accounting by a business to be a tax expenditure, but the Treasury Department does not (see page 21 of the JCT February 2013 report).  For more on this topic, please see Rethinking the Income Tax Calculation - A Look At Tax Expenditures, AICPA Tax Insider, 2/10/11.

What special tax rules can you justify keeping - and what is the justification?

Tax Committee Chairs Say Reform is On the Way

The chairs of the House Ways & Means and Senate Finance Committees - Congressman Camp and Senator Baucus, respectively, had an op ed in the April 7, 2013 Wall Street Journal titled - "Tax Reform Is Very Much Alive and Doable." They acknowledge that there are partisan differences that can cause problems, but still think it can be done in an open, transparent way with opportunity for the public to weigh in.

They also state they have agreed on "three fundamental principles to ensure that tax reform grows and expands the economy." These are:

1. Boost for America's families - they describe this as accomplished by simplification so "regular families" are not disadvantaged compared to "those who can afford high-price tax advisers." They want to keep the current progressive system and "close special-interest loopholes to help lower rates."
2. Level the playing field for US employers - improve international competitiveness.
3.  Parity for small businesses relative to larger businesses.

That all sounds good.  We'll have to see more details to know what it all means.  While Congressman Camp has provided some significant amount of details on international reform and changing how passthroughs might be taxed, we still need to see what the "loopholes" are that will be cut and how low the individual and corporate tax rates can go in a revenue neutral manner.

I also think it is doable. I think greater public awareness is needed on the over 200 special tax rules in the income tax and their effect relative to lower rates for all taxpayers. To better meet principles of good tax policy, we will need to have a simpler system with few special rules.  We'll see how doable that is.

What do you think?

Senator Baucus and Tax Reform

I was pleased to be invited by one of our MST alums to be a guest blogger for her CPA firm's new blog.  My post is about Senator Baucus' recent speech on his ideas and goals for tax reform. He makes some important points that should shape any comprehensive tax reform efforts.  Please take a look - here.

And check out the interesting posts of Abbott, Stringham & Lynch, CPAs. They cover tax, accounting and business strategy - well written, timely topics.