[Congressional Record Volume 151, Number 160 (Wednesday, December 14, 2005)]
[Senate]
[Pages S13575-S13577]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SMITH (for himself and Mr. Kerry):
  S. 2100. A bill to amend the Internal Revenue Code of 1986 to improve 
the deduction for depreciation; to the Committee on Finance.
  Mr. SMITH. Mr. President, our economy has changed dramatically in 
recent years as a result of the development of new technologies and 
industries. However, we have not updated our tax depreciation system to 
reflect these advancements. In fact, the recovery periods used to 
calculate depreciation allowances have not been adjusted since 1986--
and in some cases not since 1962. For example, a personal computer has 
a depreciable life of 5 years even though its economic life is only 2 
to 3 years.
  Today, I am introducing legislation that will respond to these 
changes by modernizing and simplifying the tax depreciation rules. 
Senator Kerry has joined me in introducing the Tax Depreciation, 
Modernization and Simplification Act of 2005, which will encourage 
capital investment and make it easier for companies to comply with the 
tax law.
  This legislation will allow the Treasury Department, in consultation 
with Congress, to modify and create new class lives for capital assets. 
Any new classification created by the Treasury Department must reflect 
the anticipated useful life and decline in value over time of the 
asset. In addition, it should take into account when the asset is 
technologically or functionally obsolete for its original purpose. With 
this new regulatory authority, Treasury will be able to develop class 
lives that are more in line with assets' economic lives.
  Another provision in this legislation deals with the mid-quarter 
convention. The mid-quarter convention is one of the placed-in-service 
conventions that directs when depreciation for an asset begins or ends. 
The mid-quarter convention, however, creates significant complexity. 
Taxpayers must wait until after the tax year ends to determine whether 
to use the half-year or mid-quarter convention. Therefore, consistent 
with a Joint Committee on Taxation recommendation, the bill eliminates 
the mid-quarter convention for simplification purposes.
  Small businesses are the heart of our economy. We, in Congress, 
should do everything we can to ease the administrative burdens for 
small businesses. That is why we should make small business expensing 
permanent. These rules permit small businesses to expense immediately 
up to $100,000 of the cost of property each year. This proposal will 
maintain this important simplification which is set to expire at the 
end of 2007.

[[Page S13576]]

  Finally, this legislation will allow for mass asset accounting. 
Currently, companies must generally calculate depreciation on an item-
by-item basis. For example, if a company has 200 desks or 200 
computers, they must account for and depreciate each item separately. 
This can be a challenge and an administrative burden for companies--
especially with small items, like chairs and telephones. Therefore, the 
bill will permit all companies to elect to use mass asset accounting 
for property that costs less than $10,000.
  The bipartisan Tax Depreciation, Modernization and Simplification Act 
of 2005 will make much needed changes to the tax depreciation system. I 
look forward to working with my colleagues to enact these important 
reforms and I ask unanimous consent that the text of the bill be 
printed in the record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2100

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Tax Depreciation, 
     Modernization, and Simplification Act of 2005''.

     SEC. 2. AUTHORITY TO MODIFY CLASS LIVES.

       (a) In General.--Paragraph (1) of section 168(i) of the 
     Internal Revenue Code of 1986 is amended to read as follows:
       ``(1) Class life.--
       ``(A) In general.--Except as provided in this section, the 
     term `class life' means the class life (if any) which would 
     be applicable with respect to any property as of January 1, 
     1986, under subsection (m) of section 167, as in effect on 
     the day before the date of the enactment of the Revenue 
     Reconciliation Act of 1990 (determined without regard to 
     paragraph (4) thereof and as if the taxpayer had made an 
     election under such subsection).
       ``(B) Secretarial authority.--
       ``(i) In general.--Except as provided in clause (ii), the 
     Secretary, after consultation with Congress, may prescribe by 
     regulation--

       ``(I) a new class life for any property, or
       ``(II) a class life for any property which does not have a 
     class life within the meaning of subparagraph (A).

       ``(ii) Exceptions.--Clause (i) shall not apply to--

       ``(I) residential rental property or nonresidential real 
     property, or
       ``(II) property for which a class life, classification, or 
     recovery period is assigned under subsection (e)(3) (other 
     than subparagraph (C)(v) thereof) or subparagraph (B), (C), 
     or (D) of subsection (g)(3).

       ``(iii) Standards.--Any class life prescribed or modified 
     under clause (i) shall reasonably reflect the anticipated 
     useful life and the anticipated decline in value over time of 
     the property to the industry or other group, and shall take 
     into account when the property is technologically or 
     functionally obsolete for the original purpose under which it 
     was acquired.
       ``(iv) Consultation.--Not later than 60 days before the 
     date on which the Secretary publishes any proposed regulation 
     under clause (i), the Secretary shall submit to Congress the 
     proposed regulation together with a report containing the 
     information considered by the Secretary in modifying or 
     prescribing any class life under the regulation.
       ``(v) Monitoring.--The Secretary, through an office 
     established in the Treasury, shall monitor and analyze actual 
     experience with respect to depreciable assets to which this 
     subparagraph applies.
       ``(C) Effect of modification.--Any class life with respect 
     to any property prescribed or modified under subparagraph (B) 
     shall be used in classifying such property under subsection 
     (e) and in applying subsection (g).''.
       (b) Application of Congressional Review Act.--For purposes 
     of applying chapter 8 of title 5, United States Code, to any 
     regulation prescribed under section 168(i)(1)(B) of the 
     Internal Revenue Code of 1986, each class life prescribed 
     under such section shall be considered to be a separate rule.
       (c) Effective Date.--The amendment made by this section 
     shall take effect on the date of the enactment of this Act.

     SEC. 3. ELIMINATION OF MID-QUARTER CONVENTION.

       (a) In General.--Subsection (d) of section 168 of the 
     Internal Revenue Code of 1986 is amended--
       (1) by striking paragraph (3) and redesignating paragraph 
     (4) as paragraph (3), and
       (2) in paragraph (3), as redesignated by paragraph (1), by 
     striking subparagraph (C).
       (b) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 4. MASS ASSET ACCOUNTING.

       (a) In General.--Section 168 of the Internal Revenue Code 
     of 1986 is amended by adding at the end the following new 
     subsection:
       ``(l) Mass Asset Accounting.--
       ``(1) Election.--
       ``(A) In general.--In lieu of the deduction otherwise 
     allowed under this section with respect to an item of 
     qualified property, the taxpayer may elect to add the 
     adjusted basis of such property to the mass asset account of 
     the taxpayer to which such qualified property is assigned and 
     to determine the deduction under this section using the 
     applicable depreciation method with respect to such mass 
     asset account.
       ``(B) Election to apply to all assets of the taxpayer with 
     same recovery period.--An election made under subparagraph 
     (A) shall be made in such manner as the Secretary may by 
     regulations prescribe and shall apply to all qualified 
     property of the taxpayer which has the same applicable 
     recovery period for such taxable year and all subsequent 
     taxable years.
       ``(C) Election irrevocable.--Any election made under this 
     paragraph shall be irrevocable except with the consent of the 
     Secretary. The Secretary shall prescribe rules for the proper 
     accounting of assets in a mass asset account in the case of 
     any such revocation.
       ``(2) Special rules.--
       ``(A) Modification of depreciation method.--In applying the 
     applicable depreciation method to any mass asset account, 
     subsection (b) shall be applied without regard to paragraph 
     (1)(B) thereof.
       ``(B) Adjustment to reflect half-year convention.--In 
     applying the deduction allowable under subsection (a) to any 
     mass asset account, the amount of the deduction under 
     subsection (a) shall be--
       ``(i) 100 percent of the deduction otherwise allowed under 
     this section in the case of qualified property placed in 
     service before the beginning of the taxable year, and
       ``(ii) 50 percent of the deduction otherwise allowed under 
     this section with respect to qualified property placed in 
     service during the taxable year.
       ``(C) Sale of qualified property.--
       ``(i) In general.--In the case of the sale of any property 
     the adjusted basis of which has been added to a mass asset 
     account, the balance of the mass asset account to which such 
     property was assigned shall be reduced (but not below zero) 
     by the amount of the proceeds from such sale.
       ``(ii) Recognition of gain.--If the proceeds from the sale 
     of any property the adjusted basis of which has been added to 
     a mass asset account exceed the balance of such mass asset 
     account, then the excess shall be treated as ordinary income.
       ``(3) Qualified property.--
       ``(A) In general.--For purposes of this subsection, the 
     term `qualified property' means any tangible property--
       ``(i) to which an applicable depreciation method under 
     paragraph (1) or (2) of subsection (b) applies, and
       ``(ii) the cost of which is not more than $10,000.
       ``(B) Inflation adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning after 2006, the $10,000 amount under subparagraph 
     (A)(ii) shall be increased by an amount equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2005' 
     for `calendar year 1992' in subparagraph (B) thereof.

       ``(ii) Rounding.--If any amount as adjusted under the 
     clause (i) is not a multiple of $1,000, such amount shall be 
     rounded to the next lowest multiple of $1,000.
       ``(4) Mass asset account.--The term `mass asset account' 
     means an account of the taxpayer which reflects the adjusted 
     basis of all qualified property to which the same applicable 
     depreciation method and applicable recovery period 
     applies.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after the date of 
     the enactment of this Act.

     SEC. 5. PERMANENT EXTENSION OF EXPENSING FOR SMALL 
                   BUSINESSES.

       (a) Dollar Limitation.--Paragraph (1) of section 179(b) of 
     the Internal Revenue Code of 1986 is amended by striking 
     ``$25,000 ($100,000 in the case of taxable years beginning 
     after 2002 and before 2008)'' and inserting ``$100,000''.
       (b) Reduction in Limitation.--Paragraph (2) of section 
     179(b) of such Code is amended by striking ``$200,000 
     ($400,000 in the case of taxable years beginning after 2002 
     and before 2008)'' and inserting ``$400,000''.
       (c) Inflation Adjustments.--Subparagraph (A) of section 
     179(b)(5) of such Code is amended by striking ``and before 
     2008''.
       (d) Election.--Paragraph (2) of section 179(c) of such Code 
     is amended by striking ``and before 2008''.
       (e) Computer Software.--Clause (ii) of section 179(d)(1)(A) 
     is amended by striking ``and before 2008''.
  Mr. KERRY. Mr. President, today Senator Smith and I are introducing 
the Tax Depreciation, Modernization, and Simplification Act of 2005. 
Last July, the Senate Finance Subcommittee on Long-Term Growth and Debt 
Reduction, on which Senator Smith is chairman and I am ranking member, 
held a hearing on updating our depreciation system. During the hearing, 
we heard that the current depreciation system is out of date and that 
changes should be made.
  Our tax system allows, as a current expense, a depreciation deduction 
that represents a reasonable allowance for the exhaustion, wear and 
tear of property used, or of property held for the production of 
income. Since 1981, the

[[Page S13577]]

depreciation deduction for most tangible property has been under rules 
specified in section 168 of the Internal Revenue Code. The Modified 
Accelerated Cost Recovery System, or MACRS, specified under section 168 
applies to most new investment in tangible property. MACRS depreciation 
allowances are computed by determining a recovery period called a class 
life and an applicable recovery method for each asset.
  The current depreciation system has not kept pace with technological 
advances. Several industries were not even contemplated when class 
lives were assigned in 1981, and some class lives even date back to 
1962.
  In the 1980s it would have been difficult to imagine what our 
reliance on computer and wireless technology would be today. At that 
time, for example, the wireless industry was in its infancy, and there 
was no specifically assigned life for wireless equipment. As a result, 
today's depreciation system is like playing ``audit roulette.'' There 
is no certainty in how these assets should be depreciated.
  All this matters because it impacts investment, innovation, 
competitiveness, and ultimately the quality and quantity of jobs in 
America. My home State of Massachusetts is a leader in the high tech 
industry. Massachusetts employs hundreds of thousands of skilled 
workers in key technology sectors, including computer hardware, life 
sciences, software, medical products, semiconductor, defense technology 
and telecommunications. We have learned in Massachusetts that a 
strategic tax policy can have a positive effect on economic 
competitiveness.
  For these reasons, we are introducing the Tax Depreciation, 
Modernization, and Simplification Act of 2005. This legislation makes 
four important changes to the current depreciation system.
  First, the legislation creates a process that provides the Department 
of Treasury with the authority to modernize class lives. The Secretary 
of the Treasury will prescribe regulations to provide a new class life 
for certain eligible property. Eligible property does not include 
residential rental property, nonresidential real property, or property 
for which Congress has specifically legislated the recovery period.
  The purpose of this provision is to provide Treasury with a mechanism 
to modify class lives that reasonably reflect the anticipated useful 
life and the anticipated decline in value over time of the property to 
the industry and take into account when the property becomes 
technologically or functionally obsolete to perform its original 
purpose. Treasury will also have the authority to modify class lives in 
order to more accurately reflect economic depreciation. For example, a 
personal computer has a depreciable life of 5 years, but it has an 
economic life of only 2 to 3 years. Even though a computer can be used 
for 5 years, it becomes economically obsolete after a couple of years 
because of the newer, faster, and more advanced computers on the 
market.
  Our depreciation system has not been adequately updated since 
Congress revoked Treasury's rule making authority in 1988. When the 
MACRS system was enacted in 1986, Congress directed Treasury to 
establish an office to monitor and analyze the actual experience with 
class lives and to modify class lives if the new class life reasonably 
reflected the anticipated useful life and the anticipated decline in 
value over time of the property to the industry. The authority was then 
revoked because Congress did not agree with all of the decisions made 
by Treasury.
  The authority provided in this legislation addresses this previous 
problem by requiring Treasury to consult with Congress 60 days prior to 
publishing any proposed regulations. In addition, the Congressional 
Review Act would apply to any regulation proposed by Treasury and each 
class life prescribed by Treasury would be considered a separate rule.
  Providing Treasury with the authority to modify class lives would 
allow the process to move more efficiently than allowing Congress to 
make piecemeal changes to the current depreciation system. Congress 
would provide guidelines, and Treasury would have the role of 
administering the guidelines. Under the legislation, Treasury would 
monitor and analyze the actual experience of depreciable assets and 
report their findings to Congress. We expect Treasury to establish 
guidelines that will take into consideration the fact that some assets 
lose a significant percentage of their original value in the early part 
of their lives. This legislation specifically provides consultation 
with Congress in order for Congress to continue to have a role in this 
important tax policy issue.
  We do not expect Treasury within the first year or two to review all 
classes of assets. Rather, we expect Treasury to begin with new assets 
that do not fit into the system, assets that have underdone 
technological advances, and existing assets that do not really fit into 
the current system. For example, the current system creates an 
irrational result for fiber optic lines. The class life of a fiber 
optic line depends upon whether if it is used for one-way or two-way 
communications.
  Second, the legislation would eliminate the mid quarter convention. 
The placed-in-service conventions determine the point in time during 
the year that the property is considered ``placed in service'' and this 
determines when depreciation for an asset begins or ends. Under current 
law, there are the half-year, mid month, and mid quarter conventions. 
The mid quarter convention is a source of complexity because it 
requires an analysis of the depreciable basis of property placed in 
service during the last 3 months of any taxable year. The Joint 
Committee on Taxation recommended the elimination of the mid-quarter 
convention in its 2001 recommendations on simplifying the Federal tax 
system. The calculation of the mid-quarter convention is burdensome, 
and it requires taxpayers to wait until after the end of the taxable 
year to determine whether the proper placed-in-service convention was 
used to calculate depreciation for assets during the taxable year.
  Third, the legislation would allow taxpayers to elect to use mass 
asset accounting for assets with a cost of less than $10,000. 
Generally, taxpayers calculate depreciation on an item-by-item basis. 
The bill would allow taxpayers to elect to use mass asset accounting 
for all assets with the same recovery period. This provision will help 
simplify the recordkeeping associated with depreciation.
  Fourth, the legislation would permanently extend increased expensing 
for small businesses. In lieu of depreciation, a taxpayer with a small 
amount of annual investment may elect to deduct such costs. The Jobs 
and Growth Tax Relief Reconciliation Act of 2003 increased the amount a 
taxpayer may deduct from $25,000 to $100,000 and increased the total 
amount of investment a business can make in a year and still qualify 
for expensing from $200,000 to $400,000. In addition, the Act allows 
off-the-shelf computer software to be eligible for the provision. These 
changes originally were effective for 3 years. The American Jobs 
Creation Act of 2004 provided an additional 2 year extension of this 
provision through 2007.
  The Tax Depreciation, Modernization, and Simplification Act of 2005 
would make the $100,000 and $400,000 amounts permanent and index them 
for inflation. Off-the-shelf computer software would be eligible for 
the provision. Increased expensing for small businesses helps lower the 
cost of capital for small businesses and eliminates complicated 
recordkeeping. In addition, it should reduce administrative costs for 
small businesses.
  The provisions in this legislation will not be the only 
recommendations made on how to improve our current depreciation system, 
but the four components of this legislation will result in updating and 
simplifying the current depreciation system. The Tax Depreciation, 
Modernization, and Simplification Act of 2005 will provide certainty 
for taxpayers and put an end to ``audit roulette.''
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