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What Ever Happened to Common Sense?
By Mel Miller

A friend of mine who is a CPA has been complaining about some of the provisions of the recently passed Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. The media has been fixated on the impact on individuals, but hasn’t paid much attention to how it would impact the small business sector. Before I share my friend’s concern, a review of efficient tax policy is in order.

The four goals of tax policy, as articulated by N. Gregory Mankiw, Professor of Economics at Harvard University, are as follows:

  1. Efficiency: The tax system should distort incentives as little as possible.
  2. Intergenerational equity: The tax system should raise enough revenue so current generations do not unduly burden future generations.
  3. Egalitarianism: The tax system should try to achieve a more equal distribution of after-tax incomes.
  4. Stabilization: The tax system should help to maintain the economy at full employment.

With these goals in mind, let’s review Section 179 of the tax code which defines allowable depreciation expenses. This provision of the code allows small business to expense qualifying equipment purchases rather than depreciating the expense over a number of years, up to the limit as established by Congress.

In 2011, the annual Section 179 deduction limit was $500,000. This high threshold allowed most small businesses to take advantage of expensing their purchases. The high limit was put in place during the economic slowdown to encourage small business expansion, but was scheduled for reduction because of the cost—the $500,000 limit was scheduled to be reduced to $139,000 (adjusted for inflation) for 2012.

The Taxpayer Relief Act of 2012 raised the limit back to the $500,000 for 2013. My friend’s compliant is based on the fact that Congress has made it retroactive for 2012! Depreciation schedules now all have to be adjusted for 2012, and estimated taxes based on the $139,000 limit need to be amended.

What ever happened to common sense? Making the provision retroactive to 2012 did not help to encourage business expansion, it merely added to the deficit problem. This provision failed all four goals. Congress should be ashamed!

History is that certainty produced at the point where the imperfections of memory meet the inadequacies of documentation.  -Patrick Lagrange

Posted: January 22, 2013