Section 179 and Bonus Depreciation
Senator Thune, Senator Cardin and Members of the Senate Committee on Finance
Business Income Tax Working Group, the Small Business Legislative Council (SBLC), and the Tire Industry Association (TIA) appreciates this opportunity to share its insights on the importance of tax certainty for small businesses, particularly with respect to Section 179 and bonus depreciation.
On December 31, 2013, fifty-five federal tax provisions expired. On December 19, 2014, the President signed into law the Tax Increase Prevention Act of 2014 which extended these expired tax provisions through the end of December 31, 2014, just under two weeks away. In 2015, individual and business taxpayers are again facing uncertainly as to whether any or all of these tax provisions will be extended again this year. Among the expired tax provisions are the Internal Revenue Code Section 179 (“Section 179”) deduction limits and the 50 percent bonus depreciation (“bonus depreciation”). As set forth below, these tax provisions are extremely important for small businesses and the lack of certainty with respect to their renewal or extension has proven very difficult for small businesses.
Section 179 and bonus depreciation both allow businesses to write off set amounts of annual investment in capital assets, such as machinery, in the year that the asset is purchased or leased in lieu of depreciating the investment over a number of years. Being permitted to recognize a deduction for the cost of an asset in the year in which the expense is incurred is extremely important for the growth of small businesses. This is particularly true for small businesses in the first few years of existence when significant investments in capital assets are required and the business has not yet become profitable and is at the greatest risk of failure.
Since 2003, there have been nine temporary increases or extensions to the Section 179 limits. In 2013, the American Taxpayer Relief Act temporarily increased the Section 179 deduction limit to $500,000 and increased the cap on the amount of capital assets that a business can purchase in a given year before their eligibility to take the Section 179 deduction is reduced or eliminated to $2,000,000. On January 1, 2015, these limits reverted back to the pre-2003 levels, which, without inflation indexing, are a deduction limit of $25,000 and an asset purchase cap of $200,000. Similarly, bonus depreciation, which was first introduced in 2002, expired altogether on December 31, 2014.
Allowing the Section 179 limits to stay at the pre-2003 levels and not extending bonus depreciation, will strike a significant blow to small business growth and, in turn, job creation. Every day that the Section 179 limits and bonus depreciation are not resolved means another day of uncertainty for small business owners who are being forced to plan for their business’ future without being able to assess what their annual tax liability will be. This annual lack of certainty for small business owners is unsustainable.