[Congressional Record Volume 153, Number 66 (Tuesday, April 24, 2007)]
[Senate]
[Pages S4924-S4925]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY (for himself and Mr. Smith):
  S. 1197. A bill to amend the Internal Revenue Code of 1986 to improve 
the deduction for depreciation; to the Committee on Finance.
  Mr. KERRY. Mr. President, today Senator Smith and I are introducing 
the ``Tax Depreciation, Modernization, and Simplification Act of 
2007.'' This legislation will update our depreciation system so that it 
can keep pace with new technology.
  Last July the Senate Finance Subcommittee on Long-Term Growth and 
Debt Reduction, on which Senator Smith was Chairman and I served as 
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out of date and that changes should be made.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 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 1980's it would have been difficult to imagine what our 
reliance on computer and wireless technology would be today. At that 
time, 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 reintroducing the ``Tax Depreciation, 
Modernization, and Simplification Act of 2007.'' 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 five years, but it has an 
economic life of only 2 to 3 years. Even though a computer can be used 
for five 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 those 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

[[Page S4925]]

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 no fit into the system, assets that have undergone 
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 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 three 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.
  The Tax Depreciation, Modernization, and Simplification Act of 2007 
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 mall businesses and eliminates complicated 
recordkeeping. In addition, it should reduce administrative costs for 
small businesses.
  The four components of this legislation will result in updating and 
simplifying the current depreciation system. The Tax Depreciation, 
Modernization, and Simplification Act of 2007 will provide certainty 
for taxpayers and put an end to ``audit roulette.''
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