tax policy center
Tax Topics

Tax Topics

2009 Tax Stimulus
2012 Election Tax Plans
2015 Budget
Alternative Minimum Tax (AMT)
American Jobs Act of 2011
Brief Description of the Model 2013
Camp Tax Reform Plan
Current-Law Distribution of Taxes
Deficit Reduction Proposals
Distribution of the 2001 - 2008 Tax Cuts
Earned Income Tax Credit
Economic Stimulus
Education Tax Incentives
Estate and Gift Taxes
Expiration of the Bush Tax Cuts
Explanation of Income Measures 2013
Federal Budget
Fiscal Cliff
Fiscal Crisis
Flow-Through-Enterprises
Guide to TPC Tables
Health Insurance Tax Incentives
Homeownership
How to Interpret Distribution Tables 2013
Marriage Penalties
Model FAQ 2013
Model Related Resources and FAQs
Payroll Taxes
Presidential Transition - 2009
Recent Tax Stimulus Legislation
Retirement Saving
Tax Encyclopedia Index
Tax Expenditures
Tax Reform Proposals
Value-Added Tax (VAT)
Who Doesn't Pay Federal Taxes?
Working Families

E-mail Newsletter

Enter your e-mail address to receive periodic updates on TPC publications and events.

> newsletter archive

tax topics
 

conference_agreement

Return to main report card

EXTENSION OF ENHANCED EXPENSES FOR SMALL BUSINESS

Key Points

·        The proposal would extend the 2008 limits on the amount of investment that small businesses can expense, rather than depreciate through the end of 2009.

·        Both the stimulus effect and revenue cost would be very modest.

·        Although it would be easy to let the higher limits expire, past history suggests Congress often extends expiring tax benefits.

·        JCT estimates that the proposal would cost $41 million through 2019.

Current Law

 

Under Section 179 of the Internal Revenue Code, businesses may expense, or immediately deduct, the first $25,000 of investments in machinery and equipment. The amount of qualifying investment eligible for the deduction decreases dollar for dollar for amounts in excess of $200,000, so that businesses investing more than $225,000 receive no immediate deduction.

In 2003, Congress increased the amount of Section 179 expensing to $100,000 and raised the start of the phase-out range to $400,000, through the end of tax year 2009. The economic stimulus package that Congress enacted in January 2008 raised these limits for tax year 2008 to $250,000 and $800,000.

The table below summarizes Section 179 limits under current law:

Year(s)

Expensing limit

Start of phase-out

End of phaseout

2004–07

$100,000

$400,000

$500,000

2008

$250,000

$800,000

$1,050,000

2009

$100,000

$400,000

$500,000

2010 and later

$25,000

$200,000

$225,000



Stimulus Proposal

The proposal would extend the 2008 limits through the end of tax year 2009. The proposal is estimated to cost $41 million through 2019. The revenue loss would be $1.1 billion in fiscal years 2009 and 2010, but revenue would be recovered in later years when businesses would otherwise be claiming depreciation deductions.

Discussion

Section 179 expensing reduces the cost of capital for businesses that use qualifying machinery and equipment and reduces compliance costs by eliminating the need to apply tax depreciation rules and keep track of the adjusted basis of assets. It produces little benefit for those whose capital consists mainly of structures or inventory and no benefit for businesses whose investment exceeds the end of the phase-out limit. The benefit of expensing is larger for longer-lived equipment than for shorter-lived equipment, such as computers, that could otherwise be amortized over three years.

At a 10-year cost of $41 million, the proposal would have a very minor effect on the long-term budget picture and provide little net subsidy to businesses. Some businesses, however, could experience a large one-year drop in the cost of capital for some investments.

It is hard to know how much this proposal would boost the economy. There have been no studies on the effect of Section 179 expensing on the long-term level or timing of investment. Lower capital costs should encourage some additional investment, but much of the tax benefit would go to investments that would have been undertaken even if taxpayers had to depreciate them. A temporary tax incentive could accelerate some investment. However, since generous expensing rules have been in place for several years, some capital purchases that may otherwise have been accelerated already have occurred.

Some believe that expensing should be the rule for all investments, not just those made by small businesses. Expensing is equivalent to exempting the normal return on investment and would be the norm if the tax base were consumption rather than income. However, enacting expensing alone, without making other conforming changes, such as eliminating deductions for interest expense, can create inefficient arbitrage opportunities. Under such a system, investments could be profitable even if they earned sub-par returns because of the tax deductions that they generated. This is a primary concern about expanding the scope of small business expensing provisions. The gains from simplicity have to be weighed against the costs of expanding tax-shelter opportunities.

While the proposal is designed to be temporary, the higher limits originally enacted in 2003 were extended in 2005 and then raised in 2008. If taxpayers believe these higher limits will be permanent, their short-term stimulus effect would be smaller because taxpayers would have no incentive to accelerate the timing of investments.

Grade: C

The proposal would simplify tax filing for small businesses and may encourage some businesses to accelerate decisions to invest in capital equipment. It will probably have little stimulatory effect and much of the tax benefit is likely to go to businesses that would have invested anyway.

 Return to main report card