How to Sign In
Taxation in the Real World Blog
cancel
Showing results for 
Search instead for 
Did you mean: 
X
Tax Reform and Cost Recovery – What is the Future of MACRS?
Cengage
189 Views
0 Comments

Tax Reform and Cost Recovery – What is the Future ...

Contributing Author: James C. Young

At the end of July 2017, Republican leaders from the Congress and the White House released a joint statement outlining principles for tax reform. While the statement did not include a great deal of detail, it did set out a few specific goals for a tax reform effort.

The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas.

The joint statement does not call for the full expensing of all capital expenditures, which was part of the 2016 House Republican tax reform plan.  So what is meant by “unprecedented capital expensing”?  Currently, there are two provisions in the Internal Revenue Code that allow businesses to expense some of their capital investments.

  1. Additional first-year depreciation (also called “bonus depreciation”) allows a business to deduct a portion of the cost of qualified property (50 percent in 2017; 40 percent in 2018; 30 percent in 2019). In general, qualified property must be new and have a useful life of 20 years or less.  Buildings, however, do not qualify.  Bonus depreciation is set to expire at the end of 2019.
  1. Section 179 allows a business to immediately expense up to $510,000 (in 2017) of tangible personal property placed in service during the year. However, § 179 expensing phases out once a business places more than $2,030,000 (in 2017) of qualified property in service.  In 2017, a business that places in service $2,540,000 or more of qualified property will not qualify for immediate expensing.  As a result, § 179 expensing is targeted to small businesses.  As with bonus depreciation, buildings do not qualify.

By extending and/or expanding these two provisions, the Republicans could meet their goal.  In May, Senator John Thune (R-S.D.) introduced the Investment in New Ventures and Economic Success Today (INVEST) Act of 2017.  The proposed legislation – likely to be included in any Senate tax reform legislation – would make 50% bonus depreciation permanent, increase § 179 expensing by expanding the definition of qualified property and allowing up to $2 million of property to be immediately expensed, and shorten the lives of certain MACRS property.  The legislation would also allow more small businesses to use the cash method of accounting and simplify inventory accounting for these businesses.

Are There Other Perspectives to Consider?

A number of years ago, the Tax Foundation published a study on capital cost recovery across countries in the OECD (Organization for Economic Cooperation and Development).  Their study concluded that the U.S. cost recovery system provided less incentives to make capital expenditures than other OECD countries.  The Tax Foundation has long argued that full expensing is not only the correct treatment of investment cost, but it also comprises a tax change that would lead to significant economic growth.  The Committee for a Responsible Federal Budget also has written on this subject.  Here is their summary, along with a list of articles/papers for further reading.

Classroom Discussion

  1. Have your students read some (or all) of the documents above and come to class prepared to discuss these items.
  1. Here are some discussion questions to consider.

(a)        Summarize Senator Thune’s proposal.  How it would modify bonus depreciation and immediate expensing?

(b)        Discuss the Tax Foundation reports on full expensing.  How do other OECD countries deal with capital expenditures from a tax perspective?  Does this put the U.S. at a disadvantage?  Why or why not? 

(c)        Summarize the perspectives of the Committee for a Responsible Federal Budget.  What is the cost of accelerated depreciation to the Federal government?  Who benefits from this expenditure?  What are the arguments for and against accelerated depreciation?

 

SWFT Chapters

 

SWFT Individuals Chapters 1 and 8

SWFT Corporations Chapter 2

SWFT Comprehensive Chapters 1 and 8

SWFT Essentials Chapters 1 and 5

 

 

jim_young_photo.png

 

James C. Young is the Crowe Horwath Professor of Accountancy at Northern Illinois University. A graduate of Ferris State University (B.S.) and Michigan State University (M.B.A. and Ph.D.), Jim’s research focuses on taxpayer responses to the income tax using archival data. His dissertation received the PricewaterhouseCoopers/American TaxationmAssociation Dissertation Award and his subsequent research has received funding from a number of organizations, including the Ernst & Young Foundation Tax Research Grant Program. His work has been published in a variety of academic and professional journals, including the National Tax Journal, The Journal of the American Taxation Association, and Tax Notes. Jim is a Northern Illinois University Distinguished Professor, received the Illinois CPA Society Outstanding Accounting Educator Award in 2012, and has received university teaching awards from Northern Illinois University, George Mason University, and Michigan State University.