CED

January 2014

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Industry Beat Senate Tax Reform Plan Puts Cost Recovery for Dealers and Customers at Risk Draft legislation targets MACRS, LIFO, LKE and more. The Senate Finance Committee's sweeping proposal to change capital expenditure and accounting rules in an effort to both simplify the tax code and pick up revenue to finance a corporate tax rate cut has a lot for dealers to worry about. Among other things, the committee is proposing to: Increase Sec. 179 expensing and phase-out levels to $1 million and $2 million, respectively, and index those amounts for inflation. This may be the only bright spot in the committee's proposal. Increasing and stabilizing Sec. 179, which helps smaller companies buy equipment, is a top AED tax reform priority. Replace current cost recovery rules with a new depreciation system for tangible personal property comprised of four pools, with three designated for short to mid-term property, and one designated for mixed-use structures and other longer-term personal property. Pooled assets would be depreciated at rates of 38, 18, 12 or 5 percent using a 100 percent declining balance method, meaning that each year a business could deduct an amount equal to the pool balance multiplied by the depreciable percentage for that pool. Construction and agricultural equipment would be included in Pool 2 and depreciated at the 18 percent rate. (also see "Washington Insider" on page 69) Require real property to be depreciated on a straight-line basis over 43 years. Eliminate expensing for intangible drilling costs (equipment rental and other costs associated with oil and natural gas drill site preparation) and require that these costs be amortized over five years. Eliminate percentage depletion, a form of capital cost recovery used by energy, aggregates, and mineral producers. Require research and development costs to be amortized over five years. Change tax treatment of advertising costs, which are currently eligible for expensing in the year in which they are incurred. Henceforth, 50 percent of advertising costs could be expensed in the first year, with the remaining 50 percent depreciated over five years. Require accrual accounting for all businesses with average annual gross receipts over $10 million (businesses below that threshold could elect cash or accrual). Repeal LIFO and require payment of taxes on LIFO reserves over an eight-year period. Repeal like-kind exchange for exchanges taking place after 2014. AED's View The Chairman's staff of the Democratic-led Finance Committee believes that the revenue raised in the long term from corporations by the proposals in this draft could finance a significant cut to the corporate tax rate. However, a corporate rate reduction would not benefit the two-thirds of AED members that are pass-through entities. AED has long maintained that tax reform – simplification and rate reduction – should benefit all companies, regardless of how they are structured. AED objects to repealing LIFO, which is used by approximately 40 percent of equipment distributors. AED members have combined LIFO reserves of close to $600 million, meaning that repeal would cost equipment distributors more than $200 million in retroactive tax liability. AED has similar concerns about repealing LKE. Approximately one-fifth of AED members use LKE for their rental fleets and AED members collectively have more than $720 million in combined LKE deferrals. AED questions repealing a part of the tax code that has demonstrated itself to be an effective incentive for capital investment. Proposed changes to tax rules that eliminate expensing for intangible drilling costs and percentage depletion threaten to undermine economic activity and discourage investment and risk taking. Finally, instead of construction equipment being depreciable over five years, equipment owners would deduct just 18 percent of the tax value of the equipment in the asset pool annually, effectively extending cost-recovery periods and dramatically reducing the amount available each year for depreciation. In response to the Finance Committee draft, AED will prepare comments (due Jan. 17); hold a meeting of its informal AED tax reform advisory committee during the AED Summit, and include tax reform on the agenda at the AED Washington Fly-In on April 2-3. In addition, plan to attend an information session at the CONDEX Centerstage in Houston on Friday, Jan. 17. Contact aeddc@aednet.org for more information and to share your concerns. (continued on page 16) 14 | www.cedmag.com | Construction Equipment Distribution | January 2014

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