Friday, December 23, 2011
Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Salient Economic Effects
Analyst in Public Finance
Expensing is the most accelerated form of depreciation for tax purposes. Section 179 of the Internal Revenue Code (IRC) allows a taxpayer to expense (or deduct as a current expense rather than a capital expense) up to $500,00 of the total cost of new and used qualified depreciable assets it buys and places in service in 2011, within certain limits. Firms unable to take advantage of the Section 179 expensing allowance may recover the cost of qualified assets over a longer periods, using the appropriate depreciation schedules. While the Section 179 expensing allowance is not targeted at firms that are relatively small in employment, asset, or receipt size, the rules governing its use limit its benefits to such firms, for the most part.
Under IRC Section 168(k), a taxpayer may expense the full cost of qualified assets bought and placed in service in 2011, with certain exceptions. Taxpayers that could claim the so-called 100% bonus depreciation allowance have the option of monetizing any unused alternative minimum tax credits they have from tax years before 2006, within certain limits, and writing off the cost of the qualified assets over a longer period.
This report examines the current status, legislative history, and salient economic effects of the two expensing allowances. It also discusses initiatives in the 112th Congress to modify them. The report will be updated as legislative activity warrants.
Broad bipartisan support for the two allowances has manifested itself in congressional consideration of small business tax issues in recent years. And there is no evidence in the 112th Congress that this support has waned. A number of bills have been introduced in the House and Senate to permanently extend a more generous allowance than current law would allow, such as H.R. 1773 and S. 12. Some other bills, including most notably H.R. 3630, would extend the 100% bonus depreciation allowance through 2012. H.R. 3630 would also extend the current twopercentage- point reduction in the employee’s share of the federal payroll tax through 2012.
Starting in 2002, the allowances have served as one of several tax incentives for stimulating growth in the U.S. economy. This raises the question of how effective they have been. Though there are no studies that address the economic effects of the enhanced Section 179 allowances that were enacted in the previous eight years, several studies have examined the economic effects in 2002 to 2004 of the 30% and 50% bonus depreciation allowances that were then available. The two allowances apply almost to the same set of property. Basically, the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy. Take-up rates for those allowances were lower than expected, and only 10% of the firms that claimed them said that the allowances played a decisive role in their investment decisions.
Available evidence, as incomplete as it is, indicates that the 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. On the one hand, an expensing allowance has the potential to spur increased small business investment in favored assets in the short run by reducing the user cost of capital and increasing the cash flow of firms that those assets. It also has the advantage of simplifying tax accounting for depreciation for firms that take the expensing allowance. On the other hand, an expensing allowance has the potential to retard economic growth by steering capital flows away from investments with more productive outcomes than investments that are eligible for the expensing allowance.
Date of Report: December 12, 2011
Number of Pages: 20
Order Number: RL31852
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