Senate Finance Chairman Max Baucus proposed requiring companies to take deductions for many capital asset purchases over a longer period, showing for the first time the tradeoffs in his plan to lower the corporate tax rate.
Baucus’s proposal would replace the system known as accelerated depreciation with simpler rules. Some business spending that can now be immediately deducted -- research, advertising and oil and gas extraction costs -- would be spread over several years for tax purposes.
“America today is using a bloated tax code that was built for businesses close to 30 years ago,” Baucus said today in a statement. “The code is completely outdated and acting as a brake on economic growth.”
The proposals are part of the third discussion draft Baucus released this week as part of his attempt to build momentum for the biggest tax code changes since 1986. That work has been stymied in part by a partisan divide over whether the government should collect more money.
The changes proposed today would generate about as much money during the next decade as repealing accelerated depreciation, according to Finance Committee staff. A 2011 estimate from the Joint Committee on Taxation said that such a change would generate $724 billion over a decade.
That’s enough to finance a corporate rate cut of several percentage points, though final estimates aren’t available. Baucus has said he wants to see the U.S. corporate tax rate, now at 35 percent, reduced to less than 30 percent.
For public companies, the depreciation change combined with a corporate rate cut would cause an immediate one-time boost to earnings. That’s because, for financial statement purposes, changes in timing of tax deductions don’t affect earnings.
The corporate rate cut would reduce the value of deferred tax assets, lowering earnings. It would have the opposite effect on deferred tax losses, so the financial statement effect for any company would depend on its individual circumstances and other provisions in any tax law.
Under current depreciation rules, the cost of each asset is deducted over a set period. The changed system, modeled in part on rules in Canada, would group assets into four pools designed to better reflect the assets’ economic life.
Within each pool, companies could deduct a set percentage of the value each year -- 38 percent, 18 percent, 12 percent and 5 percent. Real property would be depreciable over 43 years.
The proposal would repeal last-in, first-out accounting, adopting an administration proposal opposed by wholesalers and oil and gas companies.
Costs related to extracting natural resources and conducting business research would be deducted over five years. Advertising expenses could be deducted 50 percent in the first year and the rest over five years, a change that advertisers and broadcasters have been anticipating and fighting.
“For 100 years, advertising has been treated as an ordinary and necessary expense of doing business, no different than the costs of employee salaries, rent and utilities,” the National Alliance of State Broadcasters Associations wrote to Baucus Nov. 19.
“Any modifications to the tax treatment of advertising will have a significant impact on local television and radio stations, our audiences, and those community businesses that rely on broadcast advertising to sell their goods and services,” according to the state broadcasters’ group.
For small businesses, Baucus’s proposal would make it easier to use cash accounting and expense $1 million in capital purchases.