Wyden proposes depreciation revamp
US depreciation allowances would be rewritten under a draft bill that the ranking Democrat on the Senate tax committee, Ron Wyden (D-Oregon), is circulating for comment.
The bill is a discussion draft.
It could become important if the Democrats take control of the Senate in the November elections.
It would move the United States to a pooled depreciation system. All equipment would be put into one of six asset pools. Each year, a company would deduct a fixed percentage times the aggregate unrecovered cost of equipment in the pool. Any new capital spending on equipment during the year would be added to the pool. When assets are sold, the sales price would be deducted from the pool.
Companies would transition to the new system by transferring the remaining unrecovered bases in their assets into the pools.
This would simplify not only how depreciation is calculated, but also the calculation of gain or loss on asset sales. A company would report gain only to the extent the balance in the pool is driven negative by asset sales in a year. The negative balance would be reported as ordinary income. Asset sales would not trigger losses.
The depreciation percentages are 49% for assets in pool 1, 34% for pool 2, 25% for pool 3, 18% for pool 4, 11% for pool 5 and 8% for pool 6.
Wind, solar, geothermal and fuel cell projects would be in pool 2. The depreciation percentage for assets in a pool would be applied against a declining balance. Thus, for example, if an asset in pool 2 cost $100X, depreciation the first year would be $34X and the second year would be $66X x 34% = $22.44. However, if the company added another $100X asset in year 2, then depreciation that year would be $166X x 34% = $56.44.
It would not matter when during the year the new assets are put in service.
Gas-fired power plants and LNG terminals would be in pool 5.
Hydroelectric facilities are in pool 6.
Wyden asked in late April for comments on all aspects of the draft bill and in particular on transition rules.
Congress usually writes transition rules to give companies that already own or have made binding commitments to invest in assets before the tax law changes are first approved by one of the Congressional tax-writing committees the chance to see the investments through with the existing tax subsidies. There is no such transition relief in the Wyden bill. The bill says the pools would start with the unrecovered bases of a company’s assets at the start of the tax year the bill takes effect. Transition relief could still be added. However, an issue will be whether to let companies keep existing subsidies while also benefiting fully from lower corporate tax rates if the depreciation bill is enacted as part of a broader corporate reform package that reduces corporate tax rates.
Senator Max Baucus (D-Montana), who preceded Wyden as the ranking Democrat on the Senate tax committee, introduced a pooled depreciation proposal in November 2013 before leaving the Senate to take up the post of US ambassador to China. The Baucus bill would have put equipment into four asset pools and slowed down depreciation rather than accelerated it.
The pooled concept makes it easy to adjust the depreciation percentages once Congress gets into corporate tax reform and can assess whether it needs to use depreciation to raise revenue to pay for corporate rate reductions. The current bill draft sets the depreciation percentages at levels that leave the overall bill revenue neutral.