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Tax Reform on The Horizon

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At this point, neither branch of Congress are close to getting a proposal of their committees, but I thought you would like to know what they are thinking. Most of the changes being proposed by Senator Max Baucus (D-MT), the top Senate taxwriter directly impact business who have responded angrily. Depreciation is a prime target.  This has historically been an easy target since the rules are so complicated and it does not directly impact the general public.  Here is what is being proposed:

  • The time to write off for real estate would be lengthened from 39 years to 43 years.
  • All other assets would be placed in to one of four depreciation pools based on useful lives and a set percentage of the costs of assets in each pool would be deducted each year.  This means that you do not need to keep track of write-offs for each assets.  If an asset is sold, the proceeds reduce the pool’s balance.  If a pool falls  below zero, the negative amount becomes ordinary income.
  • The limit on expensing (Section 179) would be limited to $1 million and phase out after $2 million of assets are placed into service.

Here are some of the other proposed changes:

  • Intangible assets – would be amortized over 20 years  instead of 15.
  • R&D costs – would be amortized over 5 years but smaller companies would be able to expense these costs.
  • Advertising expense – a 60% deduction would be allowed in the first year and the remaining 40% gets amortized over a four year period.
  • Inventory – no more LIFO.  The income from the change in method would be recognized over an 8 year period.

Adopted from 12/6/13 The Kiplinger Tax Letter


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