Call for Slower Capital Write-Offs Draws Ire of Business: TaxesAaron E. Lorenzo and Marc Heller
Business groups including the National Association of Manufacturers and restaurant owners have given a cool reception to a congressional proposal to slow depreciation deductions as part of a tax-code revision.
Requiring companies to take deductions for many capital asset purchases over a longer period shouldn’t be part of changes to the U.S. tax code, the groups said in letters to the Senate Finance Committee, Bloomberg BNA reported.
The feedback was requested by committee Chairman Max Baucus, a Montana Democrat, as he offered the idea of the slower write-offs as part of discussions drafts for a tax-code revamp he released late last year.
The reaction underscores the difficulty of the broader effort that he and Representative Dave Camp, a Michigan Republican, have been leading in Congress, especially with Baucus on track for Senate confirmation within weeks as U.S. ambassador to China.
Under Baucus’s depreciation proposal, some business spending that now can be immediately deducted -- such as for research, advertising and oil and gas extraction costs -- would be spread over several years for tax purposes. The change would be part of the tradeoff for lowering the corporate tax rate, a central aspect of various plans to revise the tax code.
Groups criticizing the cost recovery system suggested by Baucus said that under it, depreciation deductions would take effect more slowly than the rate at which investments became obsolete for some industries and taxpayers.
“By spreading depreciation deductions over a longer period of time, the proposal in the discussion draft could make investment in productive assets more expensive and discourage investment in some assets,” the National Association of Manufacturers said in its letter.
The existing accelerated depreciation regime promotes economic growth by stimulating investment, which has a multiplier effect throughout the economy, NAM said.
The NAM letter and one from the Alliance for Competitive Taxation, whose members include Verizon Communications Inc., Bank of America Corp. and Pfizer Inc., expressed concerns that Baucus’s plans wouldn’t reduce tax rates enough to make proposals such as his slower depreciation schedule more palatable.
The Real Estate Roundtable wrote that the depreciation plan would have a chilling effect on its sector of the U.S. economy.
Since Baucus released his proposal, restaurateurs have objected that it would increase their timeline for depreciating major physical improvements to 43 years from the 15 years called for through 2013.
Sonic Corp., for instance, seeks to keep its retro drive-in eateries looking fresh by renovating them every seven to nine years.
“SONIC believes the upkeep of the exterior of our restaurants is essential in the highly competitive restaurant industry,” said Patrick Lenow, vice president of public relations for the company that has 3,500 restaurants nationwide, mainly through franchises.
Although the tax code calls for a 39-year depreciation timeline for restaurants, Congress has repeatedly extended a temporary 15-year depreciation period to put the industry on equal ground with convenience stores at gas stations, for instance. That provision expired Dec. 31 with other so-called tax extenders.
Farm groups are fighting Baucus’s plan to lengthen to 43 years the depreciation period on barns, greenhouses and agricultural buildings used for single purposes such as raising livestock. The current depreciation period is 20 years for a barn, 10 years for a single-purpose structure and seven years for a greenhouse, said the American Farm Bureau Federation.
Baucus and Camp spent much of 2013 promoting a reduction in the corporate tax rate from the current 35 percent, though the details of their approaches varied. The cuts and depreciation changes Baucus has sought are intended to make the effective tax rates of companies more equal, taking breaks away from those who benefit and lowering the rate for everyone else.
Baucus’s changed depreciation system would pool certain types of assets into four categories, a change designed to better approximate economic depreciation based on estimates from the Congressional Budget Office. The proposal is based in part on rules in Canada.
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.
Capital-intensive companies such as Deere & Co. probably would be hurt and companies profiting from past investments such as Visa Inc. would benefit.
Baucus released his draft on the tax code’s cost recovery provisions in November, before President Barack Obama nominated him for the ambassadorship. He also released drafts to change taxes on income earned abroad, energy and tax collection.
Though Baucus’s anticipated departure from the Senate has slowed the tax revision push, his proposals have helped focus attention on specific issues that will continue to spur debate, including the depreciation deduction.
A spokesman for the Senate Finance Committee declined to say how many stakeholders sent in response letters, or to quantify the share that came from tax advocacy groups such as ACT, trade associations like NAM or particular companies and individual taxpayers.