Wednesday, July 31, 2013
Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 113th Congress, and 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 $500,000 of the total cost of new and used qualified depreciable assets it buys and places in service in 2013, within certain limits. Firms unable to take advantage of this allowance may recover the cost of qualified assets over longer periods, using the appropriate depreciation schedules from Sections 167 and 168. 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 generally confine its benefits to such firms.
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 2013. Taxpayers that can claim the allowance have the option of monetizing any unused alternative minimum tax credits left over from tax years before 2006, within certain limits, and writing off the cost of the assets that qualify for the allowance over longer periods.
This report examines the current status, legislative history, and economic effects of the two expensing allowances. It also discusses initiatives in the 113th Congress to modify them. The report will be updated as legislative activity warrants.
Both expensing allowances have enjoyed broad bipartisan support in recent Congresses. The American Taxpayer Relief Act of 2012, P.L. 112-240, increased the maximum Section 179 expensing allowance to $500,000 and the phaseout threshold to $2 million for qualified assets acquired and placed in service in 2012 and 2013. The act also extended through 2013 the 50% bonus depreciation allowance from 2012. Several bills (e.g., S. 1085) to extend or enhance the two allowances have been introduced in the 113th Congress. But with tax reform a high priority for the chairmen of the House Ways and Means and Senate Finance Committees, the outlook in the current Congress for enacting changes in either or both allowances is uncertain.
Since 2002, the two allowances have served as one of several tax incentives for stimulating 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 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 mostly 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 had 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 and speeding up the timing of qualified investments.
Date of Report: July 15, 2013
Number of Pages: 22
Order Number: RL31852
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