By Mike Antich
Senator Max Baucus of Montana included a provision to extend bonus depreciation in H.R. 5297, known as the "Small Business Jobs Act of 2010." The bill extends the additional, first-year 50-percent depreciation for qualifying property purchased and place in service in 2010. This first-year write-off of 50 percent of the purchase price, known as bonus depreciation, expired Jan. 1, 2010. If passed into law, H.R. 5297 will retroactively extend bonus depreciation through calendar-year 2010. "However, the Senate leadership does not yet have the necessary 60 votes to pass H.R. 5297 because of the many contentious issues in the bill," said Pat O'Connor, legislative counsel for the NAFA Fleet Management Association.
History of Bonus Depreciation
On Feb. 20, 2008, President Bush signed into law the Economic Stimulus Act of 2008, which, among other things, included an additional first-year depreciation deduction equal to 50-percent of the adjusted basis of new equipment, such as fleet vehicles. Under President Obama, the American Recovery and Reinvestment Act (ARRA) enacted in February 2009 extended bonus depreciation through calendar-year 2009. The 50-percent first-year bonus depreciation in ARRA had a sunset provision of Jan. 1, 2010, which H.R. 5297 seeks to extend to year-end 2010.
Normally, businesses recover the cost of equipment and other capital investments through specified depreciation deductions, known as MACRS (modified accelerated cost recovery system). Under this system, cars have a five-year life and the recovery deductions by year are 20 percent, 32 percent, 19.2 percent, 11.5 percent, and 5.8 percent. Bonus depreciation allows a higher depreciation in the first year, but lowers depreciation deductions in the remaining years. Allowing companies to depreciate a greater percentage of the purchase price in the first year lowers a company's tax liability for the year in which new equipment (such as a fleet vehicle) is put in service.
If H.R. 5297 becomes law, it would be the fifth time this decade that first-year bonus vehicle depreciation has been used as an economic stimulus. It was first introduced in March 2002, after the terrorist attacks of Sept. 11, 2001. At that time, Congress passed HR 3090, known as the Economic Security and Recovery Act of 2001, which provided a 30-percent bonus depreciation for a three-year period. In May 2003, the Jobs and Growth Tax Relief Reconciliation Act increased this first-year bonus depreciation to 50 percent. This temporary change in the tax code expired Jan. 1, 2005. Later, in both 2008 and 2009, Congress temporarily allowed businesses to recover the costs of capital expenditures made during those years faster than the current depreciation schedule would allow. In the last two years, thousands of companies took advantage of the bonus depreciation provision to immediately write-off 50 percent of an asset's tax basis.
Fleet Industry Should Support H.R. 5297
Strong supporters for the extension of bonus depreciation are the NAFA Fleet Management Association and the American Automotive Leasing Association (AALA). Bonus depreciation is proven to stimulate investments in equipment and other assets in the near term by enabling businesses to write-off costs more quickly. For example, business purchasing increased in the last two quarters of 2009 after a year-and-a-half of decline, according to the Bureau of Economic Analysis. Economists rate bonus depreciation as one of the most productive economic stimulus initiatives. The Institute for Policy Innovation, in a 2001 study, estimated that every dollar of tax relief dedicated to accelerated depreciation results in approximately $9 of GDP growth.
Critics argue bonus depreciation will not substantially benefit commercial fleets in the long run because it is quickly recaptured when a vehicle is remarketed. If you resell an asset fairly rapidly, as do commercial fleets, you give back the bonus depreciation in the form of recapture. However, the 50-percent bonus depreciation provision benefits fleets with long-life assets, such as trucks, off-road inventory, and other specialty equipment.
Support is strong to extend bonus depreciation through 2010. In an August 13 letter, NAFA urged the leadership of the U.S. House of Representatives and the U.S. Senate to reinstate the 50-percent bonus depreciation. In addition, 82 other national business organizations representing a broad spectrum of industries have also urged Congress to pass the bill. The Associated Equipment Distributors testified before the U.S. House of Representatives stating:
"Whatever the state of the U.S. economy, the depreciation bonus will facilitate growth. If recovery is under way, the depreciation bonus will strengthen it and help it take hold; if the economy is once again deteriorating, the depreciation bonus will encourage business purchasing, thereby stimulating economic activity and helping avoid another major slowdown."
We too, as an industry, need to urge members of Congress to pass H.R. 5297 and extend first-year 50-percent bonus depreciation. It has benefitted the commercial fleet market in the past and it will do so again.
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