STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - December 14, 2005)
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Mr. KERRY. Mr. President, today Senator Smith and I are introducing the Tax Depreciation, Modernization, and Simplification Act of 2005. Last July, the Senate Finance Subcommittee on Long-Term Growth and Debt Reduction, on which Senator Smith is chairman and I am ranking member, held a hearing on updating our depreciation system. During the hearing, we heard that the current depreciation system is out of date and that changes should be made.
Our tax system allows, as a current expense, a depreciation deduction that represents a reasonable allowance for the exhaustion, wear and tear of property used, or of property held for the production of income. Since 1981, the depreciation deduction for most tangible property has been under rules specified in section 168 of the Internal Revenue Code. The Modified Accelerated Cost Recovery System, or MACRS, specified under section 168 applies to most new investment in tangible property. MACRS depreciation allowances are computed by determining a recovery period called a class life and an applicable recovery method for each asset.
The current depreciation system has not kept pace with technological advances. Several industries were not even contemplated when class lives were assigned in 1981, and some class lives even date back to 1962.
In the 1980s it would have been difficult to imagine what our reliance on computer and wireless technology would be today. At that time, for example, the wireless industry was in its infancy, and there was no specifically assigned life for wireless equipment. As a result, today's depreciation system is like playing ``audit roulette.'' There is no certainty in how these assets should be depreciated.
All this matters because it impacts investment, innovation, competitiveness, and ultimately the quality and quantity of jobs in America. My home State of Massachusetts is a leader in the high tech industry. Massachusetts employs hundreds of thousands of skilled workers in key technology sectors, including computer hardware, life sciences, software, medical products, semiconductor, defense technology and telecommunications. We have learned in Massachusetts that a strategic tax policy can have a positive effect on economic competitiveness.
For these reasons, we are introducing the Tax Depreciation, Modernization, and Simplification Act of 2005. This legislation makes four important changes to the current depreciation system.
First, the legislation creates a process that provides the Department of Treasury with the authority to modernize class lives. The Secretary of the Treasury will prescribe regulations to provide a new class life for certain eligible property. Eligible property does not include residential rental property, nonresidential real property, or property for which Congress has specifically legislated the recovery period.
The purpose of this provision is to provide Treasury with a mechanism to modify class lives that reasonably reflect the anticipated useful life and the anticipated decline in value over time of the property to the industry and take into account when the property becomes technologically or functionally obsolete to perform its original purpose. Treasury will also have the authority to modify class lives in order to more accurately reflect economic depreciation. For example, a personal computer has a depreciable life of 5 years, but it has an economic life of only 2 to 3 years. Even though a computer can be used for 5 years, it becomes economically obsolete after a couple of years because of the newer, faster, and more advanced computers on the market.
Our depreciation system has not been adequately updated since Congress revoked Treasury's rule making authority in 1988. When the MACRS system was enacted in 1986, Congress directed Treasury to establish an office to monitor and analyze the actual experience with class lives and to modify class lives if the new class life reasonably reflected the anticipated useful life and the anticipated decline in value over time of the property to the industry. The authority was then revoked because Congress did not agree with all of the decisions made by Treasury.
The authority provided in this legislation addresses this previous problem by requiring Treasury to consult with Congress 60 days prior to publishing any proposed regulations. In addition, the Congressional Review Act would apply to any regulation proposed by Treasury and each class life prescribed by Treasury would be considered a separate rule.
Providing Treasury with the authority to modify class lives would allow the process to move more efficiently than allowing Congress to make piecemeal changes to the current depreciation system. Congress would provide guidelines, and Treasury would have the role of administering the guidelines. Under the legislation, Treasury would monitor and analyze the actual experience of depreciable assets and report their findings to Congress. We expect Treasury to establish guidelines that will take into consideration the fact that some assets lose a significant percentage of their original value in the early part of their lives. This legislation specifically provides consultation with Congress in order for Congress to continue to have a role in this important tax policy issue.
We do not expect Treasury within the first year or two to review all classes of assets. Rather, we expect Treasury to begin with new assets that do not fit into the system, assets that have underdone technological advances, and existing assets that do not really fit into the current system. For example, the current system creates an irrational result for fiber optic lines. The class life of a fiber optic line depends upon whether if it is used for one-way or two-way communications.
Second, the legislation would eliminate the mid quarter convention. The placed-in-service conventions determine the point in time during the year that the property is considered ``placed in service'' and this determines when depreciation for an asset begins or ends. Under current law, there are the half-year, mid month, and mid quarter conventions. The mid quarter convention is a source of complexity because it requires an analysis of the depreciable basis of property placed in service during the last 3 months of any taxable year. The Joint Committee on Taxation recommended the elimination of the mid-quarter convention in its 2001 recommendations on simplifying the Federal tax system. The calculation of the mid-quarter convention is burdensome, and it requires taxpayers to wait until after the end of the taxable year to determine whether the proper placed-in-service convention was used to calculate depreciation for assets during the taxable year.
Third, the legislation would allow taxpayers to elect to use mass asset accounting for assets with a cost of less than $10,000. Generally, taxpayers calculate depreciation on an item-by-item basis. The bill would allow taxpayers to elect to use mass asset accounting for all assets with the same recovery period. This provision will help simplify the recordkeeping associated with depreciation.
Fourth, the legislation would permanently extend increased expensing for small businesses. In lieu of depreciation, a taxpayer with a small amount of annual investment may elect to deduct such costs. The Jobs and Growth Tax Relief Reconciliation Act of 2003 increased the amount a taxpayer may deduct from $25,000 to $100,000 and increased the total amount of investment a business can make in a year and still qualify for expensing from $200,000 to $400,000. In addition, the Act allows off-the-shelf computer software to be eligible for the provision. These changes originally were effective for 3 years. The American Jobs Creation Act of 2004 provided an additional 2 year extension of this provision through 2007.
The Tax Depreciation, Modernization, and Simplification Act of 2005 would make the $100,000 and $400,000 amounts permanent and index them for inflation. Off-the-shelf computer software would be eligible for the provision. Increased expensing for small businesses helps lower the cost of capital for small businesses and eliminates complicated recordkeeping. In addition, it should reduce administrative costs for small businesses.
The provisions in this legislation will not be the only recommendations made on how to improve our current depreciation system, but the four components of this legislation will result in updating and simplifying the current depreciation system. The Tax Depreciation, Modernization, and Simplification Act of 2005 will provide certainty for taxpayers and put an end to ``audit roulette.''