Forget "bonus" depreciation. The President is set to allow full expensing of fixed assets through next year, reports Martin Sullivan at Tax.com.
The first-year write off of plant and equipment-- known as "expensing"--has long been a dream of the business community. But it will probably win Obama little support because of its temporary nature. No doubt the Obama economic team chose temporary expensing over other alternatives--like a much needed corporate tax rate cut--because the official revenue cost over ten years will score as small relative to the benefit it provides.
While many tax wonks say expensing is superior to capitalizing and depreciating assets over time, it smacks of fine-tuning by the government. Like the R&D credit, which would be permanently extended under the proposal, it amounts to the government telling businesses how to spend their money to avoid paying taxes at rates that are too high to begin with.
Mr. Sullivan sees a dim future for the plan:
The other reasons the proposal will win little support are: (1) the costs of the proposal will be offset by loophole closing provisions fiercely opposed by business and (2) the business community knows its best ally is the Republican Party. This is particularly true of the small business owners that are obsessed with extension of the Bush rate cuts for the highest income brackets.
There's a good reason for that "obsession." Expensing a five-year asset leaves you with the same taxable income, and the same tax, over a five-year period as depreciation; only the timing changes. An increase in the tax rate, in contrast, is a permanent difference in the amount paid. Those "obsessed" small businessmen didn't get to be businessmen by being bad at math. They can tell that combining full expensing with a rate increase leaves them with less money.
It will be interesting to see what the "loophole closers" will be; the articles linked by Mr. Sullivan (here and here) don't say.
UPDATE from Tax Policy Blog: Obama's Investment Equivalent of "Cash for Clunkers"
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