This content is provided by the Americans for Tax Reform Foundation.
Current Law
Over the past decade, Congress has enacted a number of provisions that allow businesses to subtract a portion of the costs of their capital purchases from taxable income.
One important provision, first introduced in 2002, is first-year “bonus” depreciation, which allows businesses to write off a certain percentage of the cost of “qualifying property” (assets like vehicles and specialty manufacturing equipment which have a depreciable life-span of less than twenty years) from their taxable income.
Businesses have enjoyed a bonus depreciation rate of 100% since 2010, the highest rate since its enactment (in 2002, the rate was 30%).
Another provision is the Section 179 deduction, which was enacted in the 2003 tax relief. Section 179 is similar to bonus depreciation, but is tailored specifically to give small businesses a boost. For the latest applicable tax year, small and medium sized businesses which purchased less than $2,000,000 in new or used equipment could write off up to $500,000 from their taxable income through Section 179.
Scheduled Changes
On Taxmageddon, 50% bonus depreciation will vanish, and Section 179 will be drastically diminished in value (the phaseout threshold will plummet by $1,800,000 to $200,000; the maximum deduction will nosedive $475,000, to a paltry $25,000). The bonus depreciation and the deductions disallowed by the Section 179 change will be replaced by the Modified Accelerated Cost Recovery System (MACRS), a depreciation schedule that forces businesses to write off the cost of capital purchases over the course of many years (up to 39, in the case of non-residential, “real” property). MACRS is currently used to depreciate assets not covered under the favorable bonus depreciation and Section 179 provisions.
ATRF Analysis
The Congressional Budget Office projects that corporate tax receipts will double relative to GDP in the near future, with some of the blame falling on the scheduled expiration of favorable depreciation rules — a roundabout tax hike resulting from deductions disallowed to business.
This tax hike will cost expanding small businesses tens of thousands of dollars every year; it will cost capital-intensive corporations hundreds of millions: when bonus depreciation reached a golden 100% in 2010, the Union Pacific Railroad Co. was able to save $450 million in taxes in a single year.
That same year, it was reported that the effective corporate federal tax rate had fallen to 12.1% of domestic profits, well below the twenty year average of 25.6%. A small percentage of this development (0.4%) was attributed to bonus depreciation, which has time and again proven a minor buffer against America’s growth-hostile corporate income tax, which is the highest in the developed world.
Bonus depreciation and Section 179 are valuable because they reduce the tax hurdle businesses face when considering new investments. The provisions incentivize consumption, which both stimulates the economy and modernizes the private sector’s capital stock. Allowing this stealth tax hike to take effect will hamstring U.S. businesses at a time when the economy cannot afford it.
10 Year Cost to Taxpayers
Department of the Treasury: $87.8 billion
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