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Top Democratic tax writer proposes to overhaul depreciation

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Tax Hot Topics: Depreciation overhaul proposedSenate Finance Committee ranking minority member Ron Wyden, D-Ore., unveiled a proposal last week that would replace current depreciation rules with a Senate Finance Committee ranking minority member Ron Wyden, D-Ore., very different, pooled asset approach.

The proposal was released as a discussion draft and follows the same general approach that former Senate Finance Committee Chair Max Baucus, D-Mont., used in a 2013 tax reform proposal. But unlike Baucus’s draft, which was designed to raise revenue for tax reform, Wyden’s proposal is revenue neutral.

The Wyden draft would replace the modified accelerated cost recovery system (MACRS) with a new pooling recovery system. Taxpayers would no longer track depreciation schedules on an asset-by-asset basis. Instead, they would pool property into six separate categories and deduct a designated percentage of the total amount in each pool annually.

The percentages are designed to be revenue neutral and produce a depreciation deduction with a current value roughly equivalent to current MACRS depreciation:
  1. 3-year property: 49%
  2. 5-year property: 34%
  3. 7-year property: 25%
  4. 10-year property: 18%
  5. 15-year property: 11%
  6. 20-year property: 8%
The pool balance would be calculated by adding the cost basis of any new assets to the beginning balance and subtracting any sale proceeds. Taxpayers would then deduct the designated percentage of the pool balance and carry over the remainder. Passenger automobiles weighing 6,000 pounds or less could not increase the pool by more than $45,000.

Generally, no gain or loss would be recognized unless the pool reached a negative balance or there were no assets left. A negative pool balance would give rise to gain under Section 1245, taxed as ordinary income, and this would restore the pool balance to zero. If no assets were left in the pool with a positive balance, the balance would be deducted as a terminal loss.

Real property would not be included in the pools and would continue to be depreciated over 27.5 years for residential property and 39 years for nonresidential property.

Wyden and Democratic Finance Committee staff are hoping the pooled approach can provide a simpler calculation, and eliminate the need for the mid-year convention and asset-by-asset tracking. However, the transition could be disruptive, and taxpayers who already track assets on an individual basis for financial accounting would no longer simply adjust these figures for tax purposes, but would be required to perform a whole new calculation.

Significant tax reform proposals are unlikely to be enacted this year, but these kinds of discussions drafts can influence future reform efforts.

For more information, please contact Dustin Stamper in the Washington National Tax Office.

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