Why This Tax Reform Provision Could Make Your Business Taxes More Complicated

By October 30, 2017Blog

By Anthony Michael

If the White House can deliver on tax reform, businesses will benefit immensely from the cuts and incentives proposed within the “Unified Framework”.  To fund the proposed tax cuts, GOP leadership is relying on a Regan-era economic theory, which argues that lower taxes will bring economic growth and expansion. While the jury is still out on the merits of supply-side economic theory, the provision for “expensing” capital investments will likely make investment decisions more complicated for businesses.

As the Unified Framework puts it, expensing would allow “businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years.” This temporary policy would be a departure from the government’s current policy, which allows businesses to write off capital expenses according to a complicated depreciation schedule of deductions over time.

Over the proposed five-year expensing period, government revenues would take a hit, as firms would be allowed to write off the full amount of their purchases as they make them. Once the expensing period expires, tax revenues should increase, as the expanded capital base will likely generate new revenue streams for businesses that take advantage of this provision.

While the growth prospects of expensing are certainly promising, many states will likely not follow the federal government on this provision. States generally do not like provisions that immediately impact their revenue in a negative way. According to Nicole Kaeding, an economist at the Tax Foundation, states have historically been hesitant to conform to instances where the federal government has accelerated depreciation rules. For expensing of equipment, one shouldn’t expect things to be any different.

Businesses that operate within dissenting states will face administrative and financial complexities. Under this setting, a business would expense their equipment at the federal level, while following a depreciation schedule at the state level. This added layer of complexity could limit business expansion prospects, and stymie the overall growth potential of tax reform.

If the White House wishes to deliver on its promise of a permanent 3% economic growth rate, they will need to ensure that states are on board with the expensing provision. Otherwise, we may find ourselves in a scenario with lower taxes, but a more “business as usual” growth rate – the likes of which, would not pay for the tax cuts in the White House’s proposal.   

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