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 $125,000 of the
total cost of new and used qualified depreciable assets it buys and places
in service in 2012, within certain limits. Firms unable to take advantage of
the Section 179 expensing allowance may recover the cost of qualified assets
over 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.
In addition, Section 168(k), which provides a so-called bonus depreciation
allowance, generally allows taxpayers to expense half the cost of
qualified assets bought and placed in service in 2012. Taxpayers that can
claim the allowance have the option of monetizing any unused alternative minimum
tax credits they have accumulated from tax years before 2006, within certain
limits, and writing off the cost of the assets that qualify for the
allowance over a longer period.
This report examines the current status, legislative history, and 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.
The two expensing allowances have enjoyed broad bipartisan support in recent
years. There is no evidence that this consensus has frayed in the 112th Congress.
A number of bills have been introduced in the House and Senate to
permanently extend a more generous Section 179 allowance than current law
allows and extend the 100% bonus depreciation allowance through 2012. The
House passed a measure (H.R. 8) on August 1, 2012, that would raise the maximum Section
179 allowance to $100,000 and the phaseout threshold to $400,000 for the 2013
tax year, index both amounts for inflation, and allow purchases of
off-the-shelf computer software eligible for the allowance through the
2014 tax year, among other things.
Since 2002, the allowances have served as one of several tax incentives for
stimulating growth in the U.S. economy. This raises the question of their
effectiveness. 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 of the 30% and
50% bonus depreciation allowances that were available from 2002 to 2004.
The two allowances applied to nearly the same 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 taking 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 investing firms. 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 could interfere with the allocation
of economic resources by diverting capital flows away from investments
with more productive outcomes.
Date of Report: August 2, 2012
Number of Pages: 21 Order Number: RL31852 Price: $29.95
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