Gary Guenther
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 $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 Congresses, and there is no reason to believe this consensus has frayed in the 112th Congress. 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. A day later (August 2), the Senate Finance Committee reported a bill (S. 3521) that would raise the maximum Section 179 allowance to $500,000 and the phaseout threshold to $2 million in 2012 and 2013 and allow taxpayers to expense up to $250,000 of the cost of qualified leasehold property improvements in those years.
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.
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: September 10, 2012
Number of Pages: 21
Order Number: RL31852
Price: $29.95
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