Federal Tax Reform

ISSUE BRIEF: Federal Taxes and Tax Reform

March 2008

Issue

Rental businesses, of all sizes are sensitive to changes in the tax code. All rental businesses require significant capitalization, thus provisions that affect depreciation and expensing rules can have a significant impact on capital formation in the rental industry. Estate taxes affect rental businesses as they try to pass ownership to the next generation.
 

Background

Tax Reform

There have been some significant discussions among leaders of the Congressional tax-writing Committees, House Ways and Means, and Senate Finance. Tax reform could take many forms and could include provisions that are linked to health care reform as well as changes in personal income tax rates. There have been several proposals to lower the corporate rate from 35 percent to as low at 28 percent. These discussions are partly a recognition that the U.S. has some of the highest corporate tax rates in the industrialized world.
 

Depreciation

Cost recovery on real estate property occurs over 39 years. Recently, some businesses, notably restaurants, have been granted a 15-year recovery period for certain qualifying leaseholder improvements. The tax code should be revised to allow businesses to depreciate real property and improvements to real property in 15 years. This will increase business investments in physical plants and expand businesses that are currently discouraged from expanding because of unfavorable depreciation rules. The Economic Stimulus Act of 2008 contains a 50-percent bonus depreciation provision on equipment that was placed in service in 2008. That provision expired on December 31, 2008. ARA supports a 2-year extension of the bonus depreciation provision as part of a new stimulus package for 2009.
 

Section 179

Expensing limits of $100,000 annually (indexed for inflation) for small businesses investing less than $400,000 annually, expire in 2009. The Economic Stimulus Act of 2008 included provisions to increase the exemption from $100,000 to $250,000 and the phase out limit from $400,000 to $800,000. Like the bonus depreciation provision, the enhanced Section 179 provision expired on December 31, 2008.   Most rental businesses are capital intensive and require significant expenditures each year to replace aging equipment in the rental fleet. The $25,000 annual expensing limit that began phasing out at $200,000 in annual investment is inadequate for small businesses competing in today’s economy. ARA supports making the current Section 179 provision permanent and increasing the expensing limit to $250,000 annually and the phase-out limit to $800,000 of annual investment with both levels indexed for inflation. 
 

Conclusion

These provisions have helped reduce taxes paid by small rental businesses. They have also created and continue to maintain long-term uncertainty for small business owners. The goals of ARA’s tax policy positions are to reduce tax burdens on small rental companies and establish stable policies that allow them to plan the future courses of their businesses.