House Passes Permanent Bonus Depreciation Bill

By July 14, 2014 October 25th, 2018 Business Blog, Fred Whitaker
Fred M. Whitaker

Fred M. Whitaker

Friday morning, the House passed, by a bipartisan vote of 258-160, H.R. 4718, a bill that would restore and make 50% bonus depreciation permanent. This allows businesses to write off 50 percent of their capital investments, including equipment purchases, in the first year instead of depreciating all the costs over time. It has been in effect in various forms for much of the last decade. When paired with extended Section 179 depreciation deductions, businesses were incentivized to buy equipment. However, both were allowed to expire at the end of last year. Section 179 depreciation is back to its historic limit of $25,000 instead of the extended limit of $500,000 and bonus depreciation expired entirely at the end of 2013.

H.R. 4718 would also allow taxpayers to claim either the 50% bonus depreciation or a portion of unused alternative minimum tax (AMT) credits in lieu of bonus depreciation. The AMT provisions also expired on December 31, 2013. No provision was made to extend Section 179 depreciation though.

An example of how the new law would work is as follows: You purchase $500,000 in new equipment for your business that would normally depreciate on a straight line over 5 years or a write off of $100,000 per year (20% each year). When combined with Section 179 and bonus depreciation, you would deduct $25,000 for Section 179, another $237,500 (1/2 the remaining $475,000), and 20% of the $237,500 remainder (another $47,500) for a total first year deduction of $310,000. Not as good as 2013 when we had $500,000 in Section 179 deductions, but much better than the current law.

Unfortunately, following the House’s vote, The White House issued a statement threatening a presidential veto regarding the bill. The White House claims that a permanent bonus depreciation break would cost the government $287 billion over the next decade. But no estimate was provided of the estimated income tax revenue from the increased purchasing activity from equipment dealers and manufacturers if it was restored.

As we’ve discussed in other articles and at the CIOMA Regional meetings, the expiration of Bonus Depreciation and the elimination of the extended Section 179 depreciation took away a significant financial tool for marketers. The fact that a proposal to revive a portion of these tools made it through the House is a good sign. Also, being an election year likely to be difficult for Democrats provides some encouragement that it could pass the Senate. Republicans believe the bill would encourage job creation and promote economic growth. Don’t invest in that new equipment just yet, the Senate and the President must formally respond to the bill.