Small Business Expensing Allowance: Current Status, Legislative Proposals, and Economic Effects Page: 4 of 14
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Small Business Expensing Allowance:
Current Status, Legislative Proposals,
and Economic Effects
Under certain circumstances, firms may deduct (or expense) more than
$100,000 of the cost of qualified depreciable assets placed in service in a tax year
between 2005 and 2007. This option for depreciation is known as the small business
expensing allowance because certain rules governing the use of the allowance restrict
its benefits to relatively small firms. In the absence of the expensing allowance,
firms would have to recover the cost of qualified depreciable assets over longer
periods through allowable depreciation deductions. The expensing allowance
represents a significant tax subsidy for business investment because it has the
potential to reduce substantially or even nullify the tax burden on the returns to
investment in qualified assets.
This report examines the economic effects of the small business expensing
allowance. It begins with an explanation of how the allowance works and a brief
summary of its legislative history. The report moves on to describe proposals in the
109th Congress to modify the allowance. It concludes with a discussion of the
allowance's likely economic effects, focusing in particular on its implications for
economic efficiency, equity, and tax administration and its impact on business
investment since the enactment of the Jobs and Growth Tax Relief Reconciliation
Act of 2003.
Current Expensing Allowance
Under section 179 of the Internal Revenue Code (IRC), business taxpayers
purchasing qualified property (or assets) may deduct (or expense) some or all of its
cost (depending on the amount) in the year in which it is placed into service,
provided certain conditions are met. As an alternative to expensing, business
taxpayers may elect to recover the cost over longer periods through allowable
depreciation deductions. Between 2005 and 2007, the maximum expensing
allowance is at least $102,000 for firms operating outside empowerment zones.1 For
firms conducting their trade or business within these zones, the maximum allowance
in that period is the lesser of $137,000 or the cost of qualified property. In 2008, the
maximum allowance is set to drop to $25,000 for firms operating outside
empowerment zones and $60,000 for firms operating within the zones, their amounts
The allowance is indexed for inflation in 2004 through 2007. In 2003, it was $100,000.
In 2004, it was $102,000. The final amount for 2005 has not been determined yet.
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Small Business Expensing Allowance: Current Status, Legislative Proposals, and Economic Effects, report, May 9, 2005; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809585/m1/4/: accessed October 19, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.