Tax Legislative Activity
Baucus Releases Final Proposal on Cost Recovery and Accounting
On Thursday, November 21, Senate Finance Committee Chairman Max Baucus (D-MT) issued his final release in a series of staff discussion drafts to reform the nation’s tax code, this one on cost recovery and accounting.
In making the case for reforming the rules regarding cost recovery and accounting, Chairman Baucus noted that many special provisions have been added to the tax code since 1986, creating large disparities in the tax treatment of different types of business investment. These disparities, according to Chairman Baucus, distort business investment choices and inhibit the efficient allocation of resources.
In his summary of today’s proposal, Chairman Baucus outlined the goals of reforming the cost recovery and accounting rules, which include:
- Establish a system of cost recovery that better approximates that decline in economic value of assets.
- Provide a stable set of cost recovery rules that allow companies to develop better future plans.
- Treat similar investments similarly so that investment choices are based on the needs of the business, rather than on taxes.
- Simplify the cost recovery system to reduce the costs of tax compliance and enforcement.
To achieve these policy goals, the Chairman includes these proposals.
Chairman Baucus’ draft would repeal the current MACRS and ADS rules and replace them with a simplified cost recovery system. The new system would include a single set of depreciation rules that apply to all business taxpayer and it would eliminate the need for businesses to calculate depreciation separately for each of their individual assets.
Regarding cost recovery, Chairman Baucus would make many other changes, including:
- Repeal the expensing for research and experimental expenditures under Section 174. Half of advertising expenses would be allowed to be expensed immediately with the remaining 50 percent to be required to be capitalized and amortized ratably over 5 years.
- Repeal the percentage depletion rules of Section 613.
- Consolidate the rules for expensing start-up expenditures and organizational costs into a single rule.
- Permanently expand and modify Section 179 expensing to reduce tax burdens and compliance costs for small businesses. For example, for years beginning after 2014, the maximum amount that may be expensed would be increased to $1,000,000, phasing out for qualifying property exceeding $2,000,000, with both thresholds indexed for inflation.
Regarding tax accounting, Chairman Baucus would:
- Allow businesses with average annual gross receipts of $10 million or less based upon the prior three year to (1) elect to adopt either cash method or accrual method of accounting, regardless of whether inventory is a material income producing factor in the business, and (2) immediately deduct the cost of inventory even if it is a material income producing factor in the business if the cash method of accounting is adopted.
- Exempt businesses below the gross receipts threshold from the requirements to capitalize direct and indirect costs of inventory acquired or produced by the taxpayer.
- Repeal the Last In, First Out (LIFO) method of accounting for inventory. Taxable income resulting from the repeal would be included in income at the new tax rate ratably over eight years.
- Repeal the lower of cost or market rule for inventory.
- Repeal the like-kind exchange rules.
Comments Requested on Proposals
Earlier this week, the Chairman released drafts on international tax reform and tax administration. Comments are requested on all aspects of the staff discussion drafts and although comments will be accepted at any time, the staff requests that they be turned in by January 17, 2014, to receive full consideration.