CRS analyzes bonus depreciation and expensing election provisions

The Congressional Research Service (CRS) has released a report (RL31852, July 15, 2013) that examines two popular tools for stimulating the economy-Code Sec. 168(k) first-year bonus depreciation and the Code Sec. 179 expensing election. The report looks at the economic effects of those provisions, proposals to change the provisions, and the effect of potential major tax reform on the provisions.

Background on bonus depreciation. Code Sec. 168(k) bonus depreciation generally allows taxpayers to deduct a prescribed percentage of the cost of qualified assets bought and placed in service in the tax year. The bonus first-year depreciation allowance is:

… 50% for qualified property acquired and placed in service: (1) after Dec. 31, 2007 and before Sept. 9, 2010; or (2) after Dec. 31, 2011 and before Jan. 1, 2014 (before Jan. 1, 2015 for certain aircraft and long-production-period property); and

… 100% for qualified property acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (before Jan. 1, 2013 for certain aircraft and long-production-period property). (Code Sec. 168(k), Reg. § 1.168(k)-1(d)(1))

Bonus first-year depreciation deductions are available for a property if: (1) it is property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less, computer software other than computer software covered by Code Sec. 197, qualified leasehold improvement property, or certain water utility property; (2) its original use commences with the taxpayer; and (3) it is timely bought and placed in service by the taxpayer.

Background on expensing election. Under Code Sec. 179, a taxpayer, other than an estate, a trust, or certain noncorporate lessors, can elect to deduct as an expense, rather than depreciate, up to a specified amount of the cost of qualifying new or used tangible personal property and certain real property placed in service during the tax year in the taxpayer’s trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can’t exceed the taxable income derived from the taxpayer’s active conduct of a trade or business. Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

For tax years beginning in 2012 or 2013: (1) the dollar limitation on the expense deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (phaseout threshold). For tax years beginning after 2013, the maximum expensing amount under Code Sec. 179 is $25,000 and the phaseout threshold amount is $200,000. (Code Sec. 179(b))

In general, property is eligible for Code Sec. 179 expensing if it is:

… tangible property that’s Code Sec. 1245 property depreciated under the Code Sec. 168 MACRS rules, regardless of its depreciation recovery period;

… up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property), if placed in service in a tax year beginning before 2014; or

… off-the-shelf computer software, if placed in service in a tax year beginning before 2014. (Code Sec. 179(d)(1))

CRS analysis of economic effects of Code Secs. 168(k) and 179. The CRS Report concludes that evidence, though incomplete, indicates that the bonus depreciation and expensing allowances probably have no more than a minor effect on the level, composition, and allocation among industries of business investment; the distribution of the federal tax burden among income groups; and the cost of tax compliance for smaller firms. Though there are no studies that address the economic effects of the Code Sec. 179 allowance, several studies have examined the economic effects of the prior law 30% and 50% bonus depreciation allowances that were available from 2002 to 2004. These studies concluded that accelerated depreciation is generally a relatively ineffective tool for stimulating the economy.

CRS’s analysis of proposed changes to Secs. 168(k) and 179. The CRS Report noted the following legislative initiatives in the 113th Congress and in the President’s budget request relating to the bonus depreciation provisions:

… In the House, H.R. 2373 would extend the current allowance through 2017 or 2018 (depending on the production period for the qualifying property) and raise the allowance to 100% for property acquired between Jan. 1, 2013 and Dec. 31, 2017 and placed in service by the end of 2017 or 2018 (depending on the production period for the qualifying property).

… In the Senate, S. 494 would expand the range of assets eligible for bonus depreciation to include “dairy producing calves and cows.”

… In the Senate, S. 1085 would apply the current bonus depreciation allowance and the option for corporations to monetize unused AMT credits from tax years before 2006 in lieu of bonus depreciation through 2015 or 2016 (depending on the production period for the qualifying property).

… In the Senate, S. 1287 would increase the limit for the 2013 tax year only on the unused AMT credits from tax years before 2006 that a corporation could claim in lieu of bonus depreciation.

… The President’s budget request for FY 2014 contains no provision that would extend or otherwise modify the current bonus depreciation allowance.

The CRS Report noted the following legislative initiatives in the 113th Congress and in the President’s budget request that would modify the Code Sec. 179 expensing allowance:

… In the House, H.R. 408 would repeal all limitations on the use of the expensing allowance, effectively allowing companies to expense the entire cost of any qualified asset placed in service starting with the tax year when the bill is enacted.

… In the Senate, S. 1085 would permanently set the maximum expensing allowance at $250,000 and the phaseout threshold at $800,000, adjust those amounts for inflation beginning in the 2015 calendar year, permanently include computer software among the assets eligible for the allowance, and permanently extend the current $250,000 expensing allowance for purchases of qualified real property: leasehold improvement, restaurant, and retail improvement property.

… President Obama’s Budget Request for Fiscal Year (FY) 2014 calls for permanently extending the current $500,000 maximum expensing allowance and the current $2 million phaseout threshold, indexing those amounts for inflation beginning in 2014, and permanently including computer software among the assets that qualify for the allowance. The expensing allowance wouldn’t apply to qualified real property after 2013.

CRS’s analysis of the effect of potential major tax reform legislation on Code Secs. 168(k) and 179. The CRS Report concluded that the outlook in the current Congress for legislation extending or otherwise modifying the depreciation allowances was uncertain. It reasoned that a key source of this uncertainty was disagreements between and among Democratic and Republican leaders in the House and Senate over how to reform the federal tax Code and whether to do so in a revenue-neutral fashion.

While both parties seem to endorse the idea of simplifying the tax Code, doing so is likely to entail reducing or eliminating a variety of existing tax breaks, possibly including the Code Sec. 179 expensing provision and the Code Sec. 168(k) bonus depreciation provision. However, since these allowances appeared to enjoy substantial support within the business community-especially among smaller firms-curtailing or eliminating them could prove politically difficult.

The CRS Report noted that Ways and Means Committee Chair Dave Camp (R-MI) had vowed to complete a tax reform measure by the end of 2013, while Senate Finance Committee Chair Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), respectively, had asked all Senators to identify by July 26 the tax breaks they would like to see retained in any tax reform bill the Senate considers. As of the date of the CRS report, neither committee chairman had introduced a tax reform bill in the current Congress.

References: For first-year bonus depreciation, see FTC 2d/FIN ¶ L-9310 et seq.; United States Tax Reporter ¶ 1684.025 et seq.; TaxDesk ¶ 269,340 et seq.; TG ¶ 14110 . For the expensing election, see FTC 2d/FIN ¶ L-9900 et seq.; United States Tax Reporter ¶ 1794 et seq.; TaxDesk ¶ 268,400 et seq.; TG ¶ 14226 .

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