The 50% bonus tax depreciation applied to both 2008 and 2009, but goes away, for the most part, in 2010. It’s pretty clear that this bonus tax depreciation hasn’t been a strong job creator in 2009, given the substantial rise in unemployment rates in 2009, while this 50% bonus tax depreciation has been in place. In fact, I think it backfires and tends to be one of the causes of higher unemployment since much of the capital spending here is to permit companies to be more productive, and thus this capital investment spurs them to reduce payroll.
I do think that this 50% bonus tax depreciation was a major player causing the very high 5.7% US GDP rise in the 4Q 2009. Keen CFOs were incentivized to make the capital expenditure purchase in the 4Q 2009 because the 50% bonus tax depreciation was going away, at least they thought. I find it interesting that pundits haven't picked up on this contributing cause of the unusual upward blip in the 4Q 2009 GDP. And then I think these same people who missed this, will also be unpleasantly surprised when the 1Q 2010 US GDP growth will be a bit lower, unless the US Senate and US House start doing their jobs and enact some meaningful job creation incentives, which start having an immediate impact in the 1Q 2010.
My recommendation here is to reinstate, on a more limited but also more targeted basis, an even more energized, sustainable job-creating bonus tax depreciation scheme for all 2010 purchases (yes, that’s by both large and small businesses) of new property depreciable under MACRS that has a Recovery Period of seven years or less (i.e. Three-Year Property, Five-Year Property, and Seven-Year Property), of any external computer software, of any external computer software development costs, or of any external web site development costs. When you check out the Tax Code, you'll see that.....wow, these three MACRS property categories are pretty all encompassing.
However, this bonus tax depreciation for 2010 would be earned only if the company also generates a minimum number of new US full-time jobs, exclusive of those from business acquisitions, in the 2010 quarter the eligible asset is placed in service.
And to create a strong incentive for businesses to retain these new hires for a reasonably long period of time, the number of US full-time employees of this business must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from when earned in 2010 to the end of 2015. If prior to 2016, the number of employees drops below the 2010 quarter-end count in which the bonus tax depreciation deduction was earned, then the proportional amount of related bonus tax depreciation will be recaptured and the related subsequent tax depreciation would change back to its normal non-bonus tax depreciation pattern.
For maximum near-term job creation, here’s the way I would pattern out the bonus tax depreciation percentages in 2010, before testing for job creation:
Quarter Asset Placed in Service…..Bonus Tax Depreciation
Because I think we should really be pushing to build up our severely depressed manufacturing sector, I would also let new plant building facility costs incurred in 2010 be eligible for a bit tuned-down bonus tax depreciation. Under existing tax law, these costs are generally presently depreciated over more than ten years. I would compute the total first ten-year tax depreciation that applies presently, and accelerate that total tax depreciation over the first ten years as follows:
2012 through 2019 (8 years at 5% each year)
The result of the above accelerated tax depreciation over the first ten years would be no CBO-scored cost for the next ten years.
Further, for these plant facility additions, I would cut the number of years of tax depreciation after the first ten years in half, and thus the amount of the tax depreciation per year could be doubled, and also at no CBO-scored cost.
Next, we need to set a maximum bonus tax depreciation deduction earned in 2010 for each job created. I think that one job created in 2010 should generate perhaps a maximum bonus tax depreciation deduction of $300,000.
Let’s assume a company purchases and places in service eligible equipment in the first quarter 2010, and that the bonus tax depreciation, using the above 80% bonus tax depreciation amount, plus also the 2010 bonus tax depreciation on the plant facility cost, if any, is say a total of $1,000,000 for full year 2010, before testing for job creation.
If this company increased its number of US full-time jobs in the first quarter 2010 by four or more, this company would be entitled to the entire $1,000,000 of bonus tax depreciation deduction in 2010, due to these first quarter 2010 eligible purchases.
If instead, the company increased its number of US full-time employees in the first quarter 2010 by only two employees, this company would earn a lower $600,000 (i.e. 2 X $300,000) of bonus tax depreciation deduction in 2010, due to these first quarter 2010 eligible purchases.
If the company didn’t increase its number of US full-time employees in the first quarter of 2010 at all, it wouldn’t receive any bonus tax depreciation in 2010 for its first quarter 2010 eligible purchases.
The ten-year CBO scoring of this initiative should be a complete wash to the US government…i.e. ZERO effect on the Federal Budget Deficit. The total tax depreciation would remain the same over the entire ten-year period. It’s just that under this recommendation, more tax depreciation will be taken in 2010, and less taken in the later nine years.
And this Job Creation Proposal #1 initiative here, coupled with Job Creation Proposal #2 on Double Barreled Manufacturing Tax Credits, principally targeted at smaller businesses, would also go a long way toward helping the US achieve its goal of being an Economic Powerhouse on the world scene. I think that under these two initiatives, there will be a huge near-term pickup in US business development and purchases of highly innovative manufacturing equipment and also the development and installation of leading-edge high technology infrastructure in businesses all over the country.
Also, with this initiative, we get a three-fer….strong, near-term business incentives to both make productive capital investments and to hire, and at no CBO-scored, ten-year cost to the US government, to boot.