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Bonus Depreciation Allowance Legislation And The CRS Report: Labor Resource Allocation And Tax Policy Issues



Introduction

Controversies surrounding depreciation allowance legislation pending in the 113th Congress involve labor resource allocation control decentralization tax policy issues. The Obama administration’s current section 530 attacks, vindicated through state unemployment agencies, manifest its policy focus on the labor resource reallocation control centralization controversy. Those states that have entered into a “Memorandum of Understanding” involving worker misclassification with the IRS and Department of Labor have inherently sided with the Obama administration in favoring labor resource allocation control centralization. Such control centralization, which now turns its focus to depreciation allowances, coalesces important factors underpinning success of the Affordable Care Act.

Extension of 2013 section 179 100% depreciation expense allowance and investment limits and section 168(k) 50% bonus depreciation, including making such provisions permanent, are currently before Congress. The House passed H.R. 4718 on July 11, 2014. The provision makes section 168(k) 50% bonus depreciation permanent. The House also passed H.R. 4457 on June 12, 2014. That provision makes the section 179 100% depreciation expense allowance up to $500,000 and the $2,000,000 investment limit permanent. Both bills are now pending before the Senate.

The Congressional Research Service (CRS), a legislative branch agency within the Library of Congress, is a public policy research arm of the United States Congress providing policy and legal analysis to committees and Members of both the House and Senate. CRS published a memorandum on July 14, 2014 titled, “Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 113th Congress, and Economic Effects.” Several important deficiencies in the report’s arguments belie the weakness of its conclusions the accelerated depreciation expense allowances do not fulfill important public policy purposes. Specifically, the report fails to—

1.  Completely explain, while unused section 179 100% depreciation expense allowance results only in a carryforward, section 168(k) 50% bonus depreciation expense allowance can give rise to or increase a Net Operating Loss (NOL) carryback,

2. Appreciate planned interplay between section 179 100% and section 168(k) 50% elections can give rise to or increase a NOL carryback, resulting in immediate income tax refund realization that favorably influence expected risk-return combinations and equity costs of capital,

3. Appreciate studies providing evidence increases in entrepreneurship concomitantly decrease unemployment,

4. Appreciate section 704 special allocations of both depreciation expense allowances between operational and capital partners enable ventures that would otherwise go unfunded,

5. Appreciate both depreciation expense allowances forestall implicit governmental “partner-like interests” in venture cash-flows during incubatory periods where small upstart firms develop internal receivable and inventory growth funding,

6. Appreciate Competent Tax Planning and Strategy Formulation Professional Services Result in Favorable Tax Administration Cost-Benefit Relationships, and

7. Recognize Public Finance Economists’ Research Methodologies Result Only in Illusory or Confounded Conclusions.

While not explicitly advancing Obama administration control centralization policy interests, the CRS Report’s infirmities reduce its purpose from an altruistic academic vindication to promoting labor resource allocation control centralization tax policy. Review of the infirmities ensues.

The CRS Report’s Limited Discussion on the Importance of Unused 100% or 50% Depreciation Expense Allowances

The CRS Report makes clear taxpayers cannot carry forward any section 179 100% depreciation expense allowances that cannot be used due to the investment limitation. The CRS Report also makes clear when section 179 100% depreciation expense allowances are not fully utilized owing to the income limitation such allowances may be carried forward indefinitely. That is, section 179 100% depreciation expense allowances cannot give rise to or increase a NOL carryback.

The CRS Report’s analysis gives short shrift to current-period unused section 168(k) 50% bonus depreciation expense allowances. It advises, “The allowance could be applied against the regular income tax and the AMT with no adjustments.” The oblique consideration in this analysis is that the section 168(k) 50% bonus depreciation expense allowance can give rise to both NOL carrybacks and carryforwards. As subsequently explained herein, short-changing the 50% bonus depreciation allowance analysis belies support of the Obama administration’s control centralization interests.

The CRS Report Fails to Appreciate Bonus Depreciation Engendered NOL Carrybacks Favorably Influence Upstart Venture Expected Risk-Return Combinations and Equity Costs of Capital

As discussed later in this critique, there are at least two scenarios where section 168(k) 50% bonus depreciation expense allowance engendered NOL carrybacks contribute to fulfilling public policy goals not considered by the CRS Report. First, when a recessionary economy leads to a reduction in employment and a rise in unemployment, revision of the labor resource allocation enables (employment: unemployment: entrepreneurial startup) transitions. In such cases, the section 168(k) engendered NOL carryback affords immediate income tax refund realization derived from high wage employment periods.

Such refunds favorably influence entrepreneurial startup expected risk-return combinations and equity costs of capital. Surely, this consequence is among the small business incentives envisioned by policymakers. It also underpins support for labor resource allocation control decentralization policy arguments.

Second, upstart operational entrepreneurs often envision solid business ventures but lack sufficient equity and creditworthiness to instigate the business plan. When a creditworthy business partner invests cash equity in the venture, partnership tax code provisions enable special allocations that can lead to the capital business partner’s section 168(k) engendered NOL carryback. Such immediate income tax refunds favorably influence entrepreneurial startup venture expected risk-return combinations and equity costs of capital. America needs to afford upstart entrepreneurship such opportunities. Accordingly, extant policy considerations and labor resource allocation control decentralization are fulfilled through such arrangements.

The CRS Report Fails to Point to Studies Indicating Increases in Entrepreneurship Lead to Decreases in Unemployment

The Small Business Administration research advocacy program led to a study finding an interrelationship between increases in entrepreneurship and productivity and decreases in unemployment. Other studies support the conclusion increases in entrepreneurship concomitantly decrease unemployment. Such evidence supports a conclusion the (employment: unemployment: entrepreneurial startup) transition is an important public policy purpose underscoring the role of the section 179 100% and section 168(k) 50% depreciation expense allowance provisions in reducing unemployment.

The CRS Report claims there is evidence the allowances would have no more than a modest effect on the economy during a downturn or period of stagnant growth. However, the CRS Report fails to consider the empowerment the allowances may bring to (employment: unemployment: entrepreneurial startup) transitions. Public policy must underscore such importance in fulfilling the (individual: societal) well-being transitive mandate. Else, individuals facing the kind of despair unplanned unemployment can bring have fewer opportunities to rely on their native talents versus government handouts. Moreover, the CRS Report’s exclusion of such important labor resource allocation analyses supports Obama administration control centralization interests.

The CRS Report Fails to Appreciate the Role of Partnership Special Allocations as a Tool for Favorably Influencing Upstart Entrepreneurial Optimal Expected Risk-Return Combinations and Equity Costs of Capital

As indicated in note 9, supra, the Internal Revenue Service recognizes partnership special allocations may favorably influence expected risk-return combinations and equity costs of capital. On the other hand, the CRS Report completely ignores strategy formulation in planning optimal use of the section 179 100% and section 168(k) 50% depreciation expense allowances. To be sure, tax planners and strategists are not insensitive to such policy-endorsed realities.

There are several considerations when electing either section 179 100% or section 168(k) 50% depreciation expense allowances in the small business setting. First, taxpayers appreciate either depreciation expense allowance reduces adjusted gross income. Planning section 179 100% and section 168(k) 50% depreciation expense allowance so as not to eliminate one or more taxpayers’ itemized or standard deductions and personal exemptions is a paramount special allocations consideration. Such planning optimizes the role income tax savings plays in favorably influencing systemic expected risk-return combinations and equity costs of capital.

Second, and as indicated above, there may be occasions when it is beneficial to engender an NOL carryback driven by the section 168(k) 50% depreciation expense allowance as a strategy to favorably influence venture expected risk-return combinations and equity costs of capital. In furtherance of such objectives, partnership special allocations materially and significantly contribute to section 179 100% and 168(k) 50% depreciation expense allowance public policy considerations. The CRS Report unequivocally fails to recognize the important allowance interactions with other Internal Revenue Code provisions such as partnership special allocations. In doing so, it creates further evidence the report was written to further Obama administration control centralization interests.

The CRS Report Fails to Appreciate the Role section 179 100% and section 168(k) 50% Depreciation Expense Allowances Play in Minimizing Implicit Governmental Partnership in Venture Cash-Flows during Incubatory Receivable and Inventory Growth Funding Periods

One of the most significant problems many upstart entrepreneurial ventures face is the implicit governmental partnership in venture cash-flows during incubatory receivable and inventory growth funding periods. Many small business firms carry both material and significant receivables and product inventories. The paradox is necessary growth can result in cash-flow pressures derived from internal financing of receivable and inventory growth at the same time governmental tax obligations impose additional and burdensome pressures on venture cash. The section 179 100% and section 168(k) 50% depreciation expense allowances contribute to sheltering firm taxable income in startup periods, minimizing such governmental tax burdens, while concomitantly enabling essential internal receivable and inventory growth funding. Inability to obtain startup venture external receivable and inventory financing exacerbates the favorable contribution the allowances play in this important regard.

Generally, the CRS Report fails to fully countenance the allowances as the government’s investment in American entrepreneurship. Certainly, the government realizes it is partially underwriting startup venture equity costs of capital. It does not do so in a reality vacuum, however. Once the entrepreneurial startup “turns the corner” on venture profits, the government starts to realize its return on investment through an increased incremental revenue base that would not have existed “but for” the empowering allowances in the first place. Accordingly, it pays for America to invest in upstart entrepreneurial ventures. The CRS Report’s failure to fully analyze this issue contributes to Obama administration control centralization interests.

The CRS Report Fails to Appreciate Competent Tax Planning and Strategy Formulation Professional Services Result in Favorable Cost-Benefit Relationships

The CRS Report addresses section 179 100% and 168(k) 50% depreciation expense allowance compliance costs for business taxpayers as an argument against Congress maintaining the allowances. First, the CRS Report adopts simplistic assumptions that do not fully appreciate public policy endorsed planning strategies like those identified in this critique. Typically, my experience is that the costs of properly planning section 179 100% and section 168(k) 50% depreciation expense allowances in settings like those discussed above are far exceeded by efficiently derived benefits the venture enjoys.

To be sure, in the absence of the allowances, many startup ventures will not come to past. Since public policy favors (employment: unemployment: entrepreneurial startup) transitions and operational-capital formation opportunities, the appropriate compliance cost/benefit analysis is a little more involved than the CRS Report countenances. Indeed, legislators supporting the allowances, and their permanency in the tax code, have it right. The cost of strategizing allowance use is far outweighed by benefits supported by important public policy considerations. Short-changing the tax administration argument belies CRS support for Obama administration control centralization interests.

The CRS Report Fails to Recognize Public Finance Economists’ Research Methodologies Result Only in Illusory or Confounded Conclusions

Economic aggregation theory, also known as social choice theory or welfare economics, implicates (individual: societal) well-being transitivity. That is, social choice theory is generally viewed as embracing a sizable society’s decision-making function. Professor Sen recognizes economics has been filled with a sense of pessimism since 1951 when Professor Arrow’s famous impossibility proof seemingly condemned the field.

Academia’s solution to Arrovian impossibility’s formidable barriers was the end run tactic of using (empirical research: theory) methodologies. The first was Markowitz’s Portfolio Theory. Fama’s Efficient Market Hypothesis was second. Sharpe’s Capital Asset Pricing Model followed suit. Professor Beaver’s information content security price research defining the usefulness of accounting information derived from the foregoing works by Markowitz, Fama, and Sharpe. Beaver’s information content research is methodological basis for economics expert witnesses testimony in fraud-on-the-market cases to establish Dura loss causation disaggregation.

Since Arrovian impossibility’s 1951 debut, the plethora of academic research in the interrelated disciplines of economics, finance, and accounting have amassed a body of empirical research in search of a theoretical basis underpinning impossibility-resolved (individual: societal) well-being transitivity. The weight of this effort motivated one commentator to conclude theory construction and empirical research interact. The finding purportedly supports the thesis rich empirical settings stimulate theory just as theories stimulate empirical work.

The begging question is whether the avalanche of empirical research undertaken to define the essential transitive theory really defeats Arrovian impossibility. Professor Sen’s sense of pessimism answers the question. Academic disciplines in economics, finance, and accounting remain as condemned today as when Sen made the statement during his 1998 Nobel acceptance speech.

The CRS Report relies on the works and studies authored by public finance economists and other analysts in support of the argument the ideals of “efficiency, equity, and simplicity” do not favor the allowances contributing to societal welfare. Since all public finance economic studies and analyses employ (empirical research: theory) methodologies, the studies remain plagued by Arrovian impossibility. That means their ideals are supported by research imbued with illusory and confounded conclusions.

Whenever an argument is supported by illusory empirical research it is safe to say it is undertaken in support of a political position and not pure academic interests. Here, by referring to illusory public finance economic arguments, the CRS Report further belies support of Obama administration control centralization interests.

Conclusion

Until the field of economics generally accepts an aggregation theory rebutting Arrovian impossibility, policymakers should recognize public finance economics empirical research proffers only illusory or confounded conclusions. Such studies are generally used to vindicate positions from one side of the aisle or the other. For the reasons cited above, policymakers should rely on their intuitive (individual: societal) aggregation assessment. It is just as reliable, if not more so, than impossibility-plagued empirical research cited in the CRS Report. H.R. 4718 and H.R. 4457 properly manifest labor resource allocation control decentralization at critical hierarchical levels in the (individual: societal) well-being migration. Promoting entrepreneurship remains America’s favorite social ideal underscoring her public policies. Therefore, empowering limited resource individuals and those burdened by (employment: unemployment: entrepreneurial startup) transitions makes enactment of these provisions paramount. Policymakers on both sides of the aisle should embrace labor resource allocation control decentralization to the extent of these important tax policy issues.

*David Randall Jenkins, Ph.D., received his doctorate in accounting and a master’s in accounting with an emphasis in tax from the University of Arizona. He has taught financial, managerial, and tax accounting courses at both the graduate and undergraduate levels. Dr. Jenkins is an AACSB academically qualified business school and tax professor owing to his peer reviewed journal article publications. His company, Algorithm LLC (algorithm-llc.com), is an IRS Approved Continuing Education Provider. Dr. Jenkins may be contacted at registrar@algorithm-llc.com.

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