Today (November 21, 2013) Senator Baucus
released the third in a series of staff discussions on tax reform. This discussion
focuses on depreciation (also called “cost recovery”) and tax accounting
methods.
Not the most exciting topics, and I
will not miss Thursday Night Football reading up on them. Let’s review them quickly.
The Senator leads off with:
America today is using a
bloated tax code that was built for businesses close to 30 years ago. The code
is completely outdated and acting as a brake on economic growth. More
must be done to simplify tax rules, lessen the burden on small businesses and
jumpstart job growth.”
(1) Reduce the number of depreciation classes to four: three for short- to mid-term property and one for longer-lived assets. There would be only one permitted depreciation method.
a. By longer-lived, think real estate,
which Baucus proposes to depreciate over 43 years.
COMMENT: There goes the never-worked-in-the-real-world-crowd again.
I have thirty years in this business, and I have never seen a proposed real
estate investment analyzed over a 43-year recovery. Doesn’t happen, folks.
(2) Slow depreciation from double-declining balance to declining balance. Real estate would remain straight-line.
(3) Allow expanded general asset accounting. This means that asset categories are pooled, and depreciation is calculated by…
a. Starting with last year’s asset pool balance
b. Increased by additions and
improvements
c. Decreased by proceeds from asset
sales and dispositions
d. And multiplying the result by a
depreciation factor
(4) Repeal like-kind exchanges.
COMMENT: Yipes.
(5) Repeal depreciation recapture for pooled assets.
COMMENT: Yay!
Treat all gain from disposition of pooled assets as ordinary
income.
COMMENT: Nay!
(6) The maximum cost of mixed- use vehicles is capped at $45,000.
a. That means that – if a car is used
for both business and personal use – the maximum cost that can be depreciated
is $45,000. That amount in turn is depreciated over 5 years.
b. I am not overly surprised. There is still
a lot of abuse – truly – in this area.
Then there are some tax accounting
changes:
(7) Repeal expensing for research and development expenses. The default treatment will be to capitalize and depreciate over 5 years.
COMMENT: This cannot make business sense. You want to explain
this proposal change to Apple, Samsung, Pfizer, or any number of research-intensive
companies?
(8) Disallow the deduction for advertising. In its place, you would deduct one-half immediately and then amortize the balance over 5 years.
COMMENT: This makes no
sense to an accountant. I associate depreciation and amortization with assets
that have use or value over more than one year. Advertising doesn’t make that
cut. Does anyone talk about the commercials from last year’s Super Bowl, for
example?
(9) Treat “qualified extraction expenditures” the same way as research and development.
COMMENT: Think fracking. The United
States is increasingly moving to energy independence (Bakken Shale, for example),
even under a hostile Administration. Do you think this change is going to help
or hurt that effort?
(10) Repeal percentage depletion.
COMMENT: Same comment as (9).
(11) Make permanent Section 179 expensing.
a. The maximum expensing would be set at
$1,000,000, with the phase-out beginning at $2,000,000.
COMMENT:
Frankly, it’s about time.
(12) The Section 197 amortization period is increased from 15 to 20 years.
(13) All business with less than $10 million in annual gross receipts can use the cash basis of accounting and not account for inventory.
COMMENT:
Wait for it...
(14) If you are not described in (13) then you are on the accrual basis of accounting.
COMMENT: When the government talks
about accrual basis, they means that they want you to pay taxes on your
receivables before you actually collect them.
(15) Businesses described in (13) do not have to suffer through the Section 263A uniform capitalization calculations.
COMMENT:
Good.
(16) LIFO is repealed.
COMMENT: I do not particularly care for LIFO, but I acknowledge that major industries use it extensively, and it is considered GAAP when auditors render their auditors’ report. The government is not chasing this down because they had brilliant debates while in accounting theory class. They want the jack.
(17) The completed contract method of accounting (think contractors) is repealed, except for small construction contracts.
Overall, Baucus is
trying to reduce corporate tax rates. At 35%, the United States has the dubious
distinction of having the highest corporate tax rate in the world. There are
consequences to having the highest rate, such as having less business. To reduce rates, he has to raise money somewhere,
and we see some of those sources above.
And remember folks:
these are only proposals.
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