Bonus depreciation — the ability to deduct 50% of the cost of a capital asset in the year of purchase, rather than depreciating it over a period of years — was enacted in 2008 as a temporary anti-recession measure. With dozens of “temporary” measures routinely re-enacted one year at a time, temporary isn’t what it used to be. Now senior senate tax writers are looking to extend bonus depreciation, too. Tax Analysts reports ($link):
Leaders of the Senate Finance Committee on June 21 introduced a bill to extend through 2010 the 50 percent bonus depreciation rate under section 168, while pledging to continue work on a separate small-business package.
In a prepared floor statement, Finance Committee Chair Max Baucus, D-Mont., characterized S. 3513, the Bonus Depreciation Extension to Create Job Act, as another tool to help small businesses.
The bonus depreciation rules of 2008 and 2009 apply to new property, but not to used property.
The problem with bonus depreciation is that it really is designed get businesses to hurry up their fixed asset purchases — stealing business activity from subsequent years. When you keep extending it, it loses its punch. It becomes an expectation, and people are less inclined to hurry up and buy when they think the break will continue into next year. Also, there are only so many fixed asset purchases to accelerate.
Bonus depreciation is also a little compliance nightmare. Most states don’t allow it, so businesses have to maintain separate depreciation schedules state-by-state for bonus assets.
If bonus depreciation is a great idea, it should be permanently added to the tax law — as should all of the “temporary” provisions that Congress keeps extending. If it’s extended more than once, it’s hard to believe it’s really temporary, and Congressional budgeteers should be forced to recognize that.
Tags: bonus depreciation, Depreciation, Max Baucus
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
What’s the point of even capitalizing most assets for small businesses with a $250,000 section 179 cap and 50% bonus depreciation?
But I think there may be some real economic stimulus to having a high section 179 cap and bonus depreciation from year to year. It will encourage companies to make bad economic decisions year after year to manage their tax bill.
They will probably take on as much debt as they can cash flow to purchase capital assets they don’t “need” but that were nice to have, because it was “on sale” due to the current year tax reduction.