Immediate expensing of the cost for capital expenditures potentially simplifies the operation of a business, however, transition rules will impact the effect of this proposal.
As mentioned in our post on cash flow taxes, the House GOP proposal for tax reform (the “Blueprint,” available here) proposes that all capital expenditures be immediately expensed in the year they are made. This treatment would apply not only to purchases of tangible property such as buildings or equipment, but to intangible property such as intellectual property (and potentially goodwill). However, land would not be treated as a capital expenditure, and the cost of land would, therefore, not be immediately expensed.
The Blueprint puts forth a number of arguments in favor of making such a change. First, immediate expensing of capital expenditures would eliminate the need for the current complicated system of tracking a taxpayer’s basis in its assets following depreciation and amortization, which does not accurately track the decline in value of a trade or business asset. In addition, different kinds of assets currently have different depreciation schedules, creating different tax rates on different forms of investment, which distorts investment decisions. Further, depreciation deductions do not account for inflation, so investors do not recover the full value of their investments. By tackling all of these problems, proponents of the House plan believe that it will encourage investment. However, others have argued that a system with immediate expensing of capital expenditures and no interest deductions might negatively impact investment spending over an extended period.