The Section 179 and Bonus Depreciation Expensing Allowances: Current Law and Issues for the 114th Congress Page: 2 of 21
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Section 179 and Bonus Depreciation Expensing Allowances
Summary
Expensing is the most accelerated form of depreciation. Section 179 of the Internal Revenue
Code allows a taxpayer to expense (or deduct as a current rather than a capital expense) up to
$25,000 of the total cost of new and used qualified depreciable assets it buys and places in service
in 2015, within certain limits. Firms unable to take advantage of this allowance may recover the
cost of qualified assets over longer periods, using the appropriate depreciation schedules from
Sections 167 or 168. While the Section 179 expensing allowance is not targeted at small firms,
the limits on its use effectively confine its benefits to such firms.
In addition, Section 168(k), which provides a so-called bonus depreciation allowance, has
allowed taxpayers to expense a portion of the cost of qualified assets bought and placed in service
in recent tax years. Taxpayers that could claim the allowance had the option of monetizing any
unused alternative minimum tax credits left over from tax years before 2006, within certain
limits, and recovering the cost of the assets that qualified for the allowance over longer periods.
The allowance expired at the end of 2014.
Since 2002, the two allowances have been used primarily as tax incentives for stimulating the
U.S. economy. Though there appear to be no studies that address the economic effects of the
enhanced Section 179 allowances that were available from 2003 to 2014, several studies have
examined the economic effects of the 30% and 50% bonus depreciation allowances from 2002 to
2004. Their findings indicated that accelerated depreciation is a relatively ineffective tool for
stimulating the overall economy during periods of weak or negative growth.
Available evidence also suggests that the expensing allowances may have a minor effect at best
on the level and composition of business investment and its allocation among industries, the
distribution of the federal tax burden among different income groups, and the cost of tax
compliance for smaller firms. The allowances have advantages and disadvantages. On the one
hand, an expensing allowance simplifies tax accounting, and a temporary allowance has the
potential to stimulate increased small business investment in favored assets in the short run by
reducing the user cost of capital and increasing the cash flow of investing firms. On the other
hand, depending on its design, an expensing allowance may interfere with the efficient allocation
of capital among investment opportunities by diverting capital away from more productive uses.
The Tax Increase Prevention Act of 2014 (PL. 113-295) extended through 2014 the Section 179
expensing allowance and the Section 168(k) bonus depreciation allowance from 2013.
On February 13, 2015, the House passed a bill (H.R. 636) that would permanently set the
maximum Section 179 allowance at $500,000 and the phaseout threshold at $2 million and index
both amounts for inflation starting in 2016. It also would make qualified computer software,
heating and air conditioning equipment, and qualified real property (e.g., improvements to lease
hold property and restaurants) permanently eligible for the Section 179 allowance.
The Senate Finance Committee favorably reported a bill (S. 1946) on July 23 that would
retroactively extend through 2016 the 50% bonus depreciation allowance and the option to
monetize alternative minimum tax credits from years before 2006 that were available in 2014. It
would also raise the maximum Section 179 expensing allowance to $500,000 and the phaseout
threshold to $2 million for 2015 and 2016, and index both amounts for inflation, among other
things.Congressional Research Service
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The Section 179 and Bonus Depreciation Expensing Allowances: Current Law and Issues for the 114th Congress, report, August 6, 2015; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc813114/m1/2/: accessed March 28, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.