Kerry Tax Simplification Legislation Will Help Small and High-Tech Businesses

WASHINGTON, Dec. 14 /U.S. Newswire/ — Sen. John F. Kerry (D-Mass.), top Democrat on the Committee on Small Business and Entrepreneurship, today introduced a bipartisan bill to simplify the tax depreciation system for small-business owners and taxpayers nationwide.

“While our small businesses were rapidly updating and expanding over the past twenty years, our tax system stayed the same. Now, we find ourselves stuck with an antiquated system that was created before most businesses had email or websites. It’s become a dinosaur that’s holding back the biggest engine of our economy,” Kerry said. “Small businesses shouldn’t have to navigate this obsolete system just to pay their taxes. These common-sense changes will free-up time for small business owners to do what they do best — grow their businesses and improve local economies all across America.”

Kerry introduced his bipartisan Tax Depreciation Modernization and Simplification Act of 2005 with Sen. Gordon Smith (R-Ore.). A key provision in the bill addresses the need to update the system used to calculate depreciation allowances, which was last updated by Congress in 1986. Some of these recovery periods date as far back as 1962.

Kerry and Smith also make the higher expensing limits for taxpayers and small businesses permanent. Often, taxpayers with small levels of investment decide to use this simpler method of writing off investments instead of using the depreciation system. This bill will provide certainty that the higher limits will not expire in 2007, and will encourage businesses to make capital investments.

Smith and Kerry currently serve together as the chairman and ranking member, respectively, of the Senate Finance Subcommittee on Long-Term Growth and Debt Reduction. Today’s legislation stems from a July hearing they held which exposed flaws in the current depreciation system.

Kerry’s legislation contains four major provisions:

Treasury Authority to Modify Class Lives

The recovery periods, or “lives”, used to calculate depreciation allowances have not been updated since 1986 and in some cases not since 1962. Since that time, new industries and technologies have developed and many assets are assigned depreciable lives that do not accurately reflect their economic or useful lives. For example, a personal computer has a depreciable life of five years — yet its economic life is only two to three years.

In general, the bill would provide the Treasury Department with the authority, after consultation with Congress, to modify or create class lives for capital assets. Any new class life must reflect the anticipated useful life and decline in value over time of the asset and take into account when the asset is technologically or functionally obsolete for its original purpose.

Elimination of Mid-quarter Convention

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 three 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.

Mass Asset Accounting

Companies generally calculate depreciation on an item-by-item basis which can be very challenging for large companies with respect to small items. For example, a large company may have 100,000 office chairs — and under current law, it must account for each chair. In general, the bill would permit all companies to elect to use mass asset accounting for property that costs less than $10,000. When elected, all assets with the same depreciable life will be lumped together and treated as one asset, which greatly simplifies recordkeeping and reduces administrative costs.

Small Business Expensing

In lieu of depreciation, a taxpayer with a small amount of annual investment may elect to deduct such costs. Under current law, small businesses are able to write off or expense immediately up to $100,000 of the cost of property each year and businesses can invest up to $400,000 a year and still be eligible for expensing. This provision expires at the end of 2007. The bill would make small business expensing permanent.

For more information on the bill, please visit: http://sbc.senate.gov/democrat/legislation.cfm.