Legislative update: Wyden releases cost recovery reform and simplification proposal

Proposal to reform cost recovery in United States

Senator Ron Wyden (D-OR), ranking member of the Senate Finance Committee, today in conjunction with a Senate Finance Committee hearing on business tax reform, introduced the Cost Recovery Reform and Simplification Act of 2016. The bill would replace the current cost recovery system with an Accelerated Mass Asset Cost Recovery and Reinvestment System (“A-MACRRS”).

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In his opening statement at today’s Senate Finance Committee hearing on business tax reform, Senator Wyden said the following with regard to his depreciation proposal:

 

If you own a small business today, you’re in danger of being ensnared in an outdated, overgrown tax code that Americans spend 6.1 billion hours and more than $100 billion complying with each year. The code is punishing those who don’t have a team of accountants and the luxury of time to plan investments around taxes. The tax code tells small businesses that their dollar is worth less, compared to sophisticated firms that can afford to make the rules work for them. I see an enormous opportunity to modernize the code and strip out a lot of that unfairness by radically simplifying our system of depreciation. That’s why today I release the Cost Recovery Reform and Simplification Act of 2016.

Overview of the proposal

According to documents released by the Finance Committee on its website in conjunction with the proposal, the bill would:

  • Replace current section 168 depreciation rules with a pooling cost recovery system for most tangible property and computer software (“pooled property”) and a straight-line cost recovery system for buildings, water utility property, and railroad grading or tunnel bore. For pooled property, there would be six pools of property. Costs would be recovered by multiplying the applicable recovery rate for each pool by the pool balance at year-end.  Pool recovery rates apparently are designed to make the proposal approximately revenue-neutral over a 10-year period. For straight-line property, costs generally would be recovered ratably over the applicable recovery period using the applicable convention. The applicable recovery period for nonresidential real property would be 39 years (27.5 years for residential rental property).
  • Eliminate recognition of gain or loss from dispositions of pooled property.  Instead, any pool with a disposed asset would be reduced by any proceeds received from the disposition. Ordinary income would be recognized to the extent a pool’s basis were ever reduced below zero.
  • Expand tax-free reinvestment rules (i.e., like-kind exchange and involuntary conversion rules) to all same-pool machinery and equipment.
  • Repeal the Alternative Depreciation System (ADS) of section 168(g), although current ADS property would remain ineligible for bonus depreciation under section 168(k).
  • Eliminate the special depreciation regime for Indian reservation property and replace it with a new 20% first year deduction.
  • Reinstate Treasury authority, subject to congressional oversight, to update asset lives to account for new technologies and a modern economy.
  • Conform E&P depreciation to regular tax depreciation
  • Reform and simplify cost recovery and accounting rules

KPMG observation

Among the preliminary observations of the proposal, it has been observed that it would eliminate almost all flexibility in the determination of depreciation. For example, there is no provision to elect to depreciate an asset, or even a group of assets, using a slower cost recovery rate than that provided for the asset’s pool. The election to depreciate property using a units of production or similar method also would be repealed.

If enacted, the proposal would likely result in increased book-tax differences around fixed assets, primarily in the treatment of dispositions. Since, under the proposal, the adjusted basis in a disposed asset would not be removed from the pool upon disposition (although the pool would be reduced by any proceeds received), taxpayers would face differences in book and tax fixed asset basis as soon as they dispose of a single fixed asset.

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