The (Potential) Rebirth of Bonus Depreciation

First enacted in the aftermath of 9/11, the federal bonus first-year depreciation allowance (“bonus depreciation”) has provided an incentive for businesses to accelerate their purchases. However, the provision expired, once again, as of December 31, 2013. As a result, significant tax benefits from prior years may not be available to companies for expensing the cost of this year’s business equipment purchases and leasehold improvements.

Of course, over the past dozen years, bonus depreciation has died – and been resurrected by Congress – several times, but has never been made permanent. The good news: The outlook seems outstanding that some form of bonus depreciation is likely to be extended retroactively for 2014 (and, probably, for 2015). The bad news: Despite bipartisan support from the tax-writing committees in both houses of Congress, it appears that bonus depreciation may not officially be brought back into the tax code until after the November 2014 mid-term elections.

On one hand, the House Ways and Means Committee recently approved legislation (H.R. 4718) that would make bonus depreciation a permanent part of the tax code. Specifically, the House bill would allow businesses to immediately deduct one-half of their new qualified business equipment purchases. In addition, it would enable companies to elect accelerated alternative minimum tax (AMT) credits in lieu of bonus depreciation, and it would expand the types of retail improvements that are eligible for bonus depreciation.

On the other hand, the Senate Finance Committee favors legislation (S. 2260) that would extend the existing 50% bonus depreciation only until December 31, 2015. This action, under the proposed Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, would extend 51 of the temporary tax provisions for a two-year period.

Before any legislation is enacted, the House of Representatives and the Senate will need to agree on a final bill that reconciles both proposals and that provides revenue “offsets” for its costs. However, leaders of both political parties, in both houses of Congress, seem to agree that it is essential to provide an incentive – such as bonus depreciation – to encourage immediate capital investments by U.S. companies.