Issue link: http://read.dmtmag.com/i/236097
Washington Insider Boring Yes, But Very Important Cost recovery rules take center stage in tax reform debate, where writers' goal of increasing tax revenue is thinly veiled. BY CHRISTIAN KLEIN Most people's eyes glaze over when they hear the words "depreciation" or "cost recovery." But at this point in the tax debate those words couldn't be more important to AED members. Over the past decade, changes to cost recovery rules – which determine how quickly a business can "write off" capital investments – have incentivized purchasing and improved dealer profitability. As part of the economic stimulus package in 2008, Congress increased Sec. 179 expensing levels and reinstated bonus depreciation to encourage businesses to buy more equipment (a primer is at DepreciationBonus.org). Given the economic depression in the construction industry, it took a while for those measures to work. But ultimately they did. Ninety-two percent of the respondents to a 2012 AED member survey said bonus depreciation had a positive impact on their 2011 sales and 70 percent said their companies had taken advantage of the law to add equipment to their rental fleets. The lesson is simple: Allowing business to write off investments more quickly can stimulate demand. So what would happen if Congress did the opposite and extended cost recovery periods? That's exactly what the Senate Finance Committee recently proposed doing. In late November, the committee's Democratic staff unveiled draft tax reform legislation to radically change cost recovery and accounting rules for American companies. At the heart of the committee's discussion draft is a plan to eliminate the Modified Accelerated Cost Recovery System (MACRS), which has been used since 1986 (the last time we had comprehensive tax reform). The committee's plan would replace MACRS with a new system in which assets would be depreciated on a class rather than individual basis. All assets in the same class would be put into an accounting pool and each year a company could deduct a percentage of the total tax value of that asset pool. Construction equipment would be in a pool with other assets with an 18 percent annual deduction rate. So, if you bought $100,000 worth of equipment, you could deduct $18,000 in the first year. Your deduction the following year would be calculated by adding the value of any equipment that had been added to the fleet and subtracting the value of any that had been withdrawn, and then multiplying that total again by 18 percent. If there had been no additions or withdrawals, the next year's deduction would be $14,760 (18 percent of $82,000 – the ending tax value of the pool from the prior year). Currently, the Year 2 deduction is $32,000. Under current law, if you buy a $100,000 machine you can depreciate it over five years and wind up at the end of that period with zero tax basis. However, under the Finance Committee's proposal, a piece of equipment would conceptually never be fully depreciated. Instead, its tax value would decline at a rate of 18 percent per year from the prior year's tax value as long as you owned the machine. The basic effect of the new system would be to expand cost recovery periods for all types of business property. Longer cost recovery periods mean that you don't have as must to deduct on an annual basis, which, assuming current tax rates, could lead to higher tax bills for AED members and their customers. There's little question that raising tax revenues is one of the Finance Committee's tax reform goals. And there's more. Many dealers dispose of some rental equipment in the same year that the asset was acquired, generally resulting in a tax loss that the dealer can recognize in the year of the disposal. However, under the proposed rules the loss would be deferred. There are those who have suggested that the pooled asset cost recovery mechanism would streamline accounting for businesses and have other tax advantages. For example, as long as the value of the asset pool never fell below zero, equipment could be added and subtracted without triggering a negative tax event (as you might encounter now if you sell a piece of equipment with book value that exceeds tax basis). Whether a business would fare better or worse under the new system would depend on how low tax rates were set and whether the new lower rates would be applied equally to C-corporations and pass-through entities. Those questions, like others will be answered as the tax reform process moves forward. At minimum, the Senate Finance Committee's proposal should be a wake-up call to distributors that the stakes are high for our industry. Go to http://1.usa.gov/18qsViR to take a look at the committee's plan, then tell us what you think by sending an e-mail to aeddc@aednet.org. CHRISTIAN KLEIN (caklein@aednet.org) AED's vice president of Government Affairs and Washington counsel. He can be reached at 703-739-9513. January 2014 | Construction Equipment Distribution | www.cedmag.com | 69