New depreciation bonus that Congress enacted last March may undergo some “technical corrections” | Norton Rose Fulbright
Congressional staff are concerned about reports that some companies are taking the position assets that do not qualify for the bonus in the hands of the current owners — because the assets were already under construction or binding contract last September 11 — can be turned into “good” assets by selling and leasing them back.
The Joint Tax Committee staff is also recommending that Congress tighten the definition of “self-constructed property.” This is important because assets that a company “acquires” do not qualify for the bonus if the company signed a binding contract before September 11 to acquire them. The rule for property that a company constructs itself is that construction cannot have begun before September 11. Most power plants and turbines are considered self constructed the way Congress wrote the law last March. The Joint Tax Committee staff thinks this was an error.
The Senate is expected at least to move against sale-leasebacks, according to Russ Sullivan, chief tax counsel to the Senate tax-writing committee. He is less sure whether the House will act this year. Sullivan said the Senate may wait to see whether the Internal Revenue Service takes action on its own before legislating.
The US Treasury is reportedly working on guidance, but any guidance is on a slower track than was thought earlier. IRS officials had said in March that guidance would be issued by “mid-year.” Now the discussion is whether to commit to such guidance in the next business plan that the IRS will issue for the 12 months starting July 1.
Meanwhile, at last count, 20 states have “decoupled” from the depreciation bonus. Many states whose tax systems piggyback on the federal income tax have decided they cannot afford lower tax receipts. Another three states allow only a partial bonus. In another five states, the state revenue departments have said the bonus is available, but bills are pending in the state legislatures to decouple. Only five state legislatures have expressly adopted the depreciation bonus (Alabama, Delaware, Oregon, Utah and Kansas).
The depreciation bonus is a speeding up of tax depreciation for new assets that are placed in service during a window period of last September 11 through December 2004 or 2005, depending on the type of asset. Most gas- and coal-fired power plants have until 2005. The idea was to give a boost to the US economy in the wake of the terrorist attacks on US soil by giving companies an incentive to invest in new plant and equipment. A company can deduct 30% of the cost of qualifying assets immediately. The other 70% of the cost is depreciated normally.
The bonus reduces the cost of a new power plant by as much as 5.39% after the tax savings are taken into account.