"Senate Finance Chair’s Accounting-Related Reform Proposals Would Repeal Favorable Provisions Senate"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

On November 21, 2013, Senator Max Baucus (D-Mont.), Chairman of the Senate Finance Committee, released a Staff Discussion Draft containing tax reform proposals relating to several accounting-related provisions of the Internal Revenue Code. With a stated objective of simplifying the tax accounting rules and making them more uniform among taxpayers in different industries, the proposals would repeal or change a number of favorable provisions of the Code. Among the discussion draft’s more significant proposals are:

  • Repeal of MACRS and bonus depreciation. Citing outdated assets classifications, the discussion draft would replace the current accelerated depreciation rules of the Modified Accelerated Cost Recovery System (MACRS) and traditional individual asset-based depreciation with a mass asset-type depreciation structure that classifies almost all tangible personal property (except computer software) into one of four pools. Depreciation would be computed annually as a fixed percentage of the pool balance: 38 percent for Pool 1, 18 percent for Pool 2, 12 percent for Pool 3 and 5 percent for Pool 4. Each year, the amount of the pool would be increased by new purchases and reduced by the proceeds of disposition of assets within the pool. Real property would be depreciated on a straight-line basis over 43 years, rather than 39 years as under current law. The new system, like MACRS, would result in larger depreciation deductions in the earlier years of asset lives, and should reduce administrative complexity. The tradeoff, however, will be longer recovery periods for many depreciable assets, as the new system is intended to better track their economic depreciation than does MACRS.
  • Changes to amortization rules. Similarly, the period for recovery of costs relating to certain acquired intangible assets under Section 197, as well as for business startup and organizational expenses, would be extended to 20 years from the 15 years allowed under current law. Mortgage servicing rights would no longer be excepted from Section 197.
  • Repeal of the LIFO method and lower of cost or market inventory methods. Taxpayers, including many retailers, that have used LIFO for many years likely have accumulated “layers” of inventory cost deductions that would have to be recaptured (as additional income). For many taxpayers the income inclusion would be quite large. Taxpayers would be allowed to take the income into account over an eight-year period.
  • Repeal of Section 1031’s “like-kind exchange” gain deferral. The discussion draft speculates that the impact of repeal on many taxpayers may be ameliorated by the new mass asset-type depreciation system for tangible personal property. That will not be true, however, in the case of taxpayers exchanging real property, who are among the most frequent users of Section 1031. Further, an entire industry of businesses serving as qualified intermediaries for such exchanges would be adversely impacted.
  • Limits on use of the cash method. Use of the cash method of accounting would be prohibited for all businesses except those with gross receipts of $10 million or less. This provision would affect many partnerships, S corporations and personal service corporations that currently are permitted to use the cash method regardless of their size.
  • Repeal of current expense deductions for R&D. Research and development costs would no longer be currently deductible, but instead would have to be capitalized and amortized over five years.
  • Limits on deductions for advertising expenses. Taxpayers would be permitted to deduct currently only 50 percent of advertising costs; the remaining 50 percent would be capitalized and amortized over five years.
  • Repeal of percentage depletion. Percentage depletion, currently allowed under Sections 613 and 613A, would be repealed, although Section 611 cost depletion would remain in place.
  • Provisions affecting home and shipbuilders. Taxpayers would be required to use the percentage of completion method, rather than the completed contract method, for many home construction contracts and ship construction contracts.
  • Repeal of several other favorable industry-specific provisions. Taxpayers in a number of industries, including oil and gas, mining, farming, TV and film, and others would be affected by the repeal of various favorable provisions regarding certain costs specific to their businesses. Current deductions for the following costs are repealed in their entirety without any new special provision for capitalization (and recovery) of costs:
  • clean-fuel vehicles,
  • qualified refiner property,
  • energy-efficient commercial building property,
  • qualified advanced mine safety equipment,
  • farmers’ fertilizer purchases,
  • certain TV and film production,
  • reforestation and
  • pollution control facilities;

The current expensing of the following costs would be repealed, but taxpayers would be allowed to recover capitalized costs over a newly provided amortization period:

  • costs for certain geological and geophysical activities, qualified tertiary injectants, intangible drilling, and mining and exploration development, all of which would be amortizable over five years; and
  • soil conservation and endangered species recovery expenditures, which would be amortizable over 28 years.

Observations

Sen. Baucus, and Rep. Dave Camp (R-Mich.), chairman of the House Ways & Means Committee, have now each released discussion drafts on tax law changes, signaling that the two chairmen, at least, are serious about tax reform. However, there continues to be significant differences between Republicans and Democrats as to the direction of tax reform, and no clear path forward (substantively or procedurally) has emerged. Even if tax reform is revenue-neutral overall (an issue that is far from settled), the push to reduce the corporate rates will force lawmakers to look to other Code sections for additional revenue. This need for additional revenue, under even the most conservative scenarios, is likely to involve changes to the tax accounting and cost recovery rules. Thus, Sen. Baucus’s tax accounting reform proposals must be considered seriously.

Download PDF

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!