In December, Congress passed the Protecting Americans from TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Hikes (PATH) Act, also known as the Extenders Bill. This bill extended a number of tax provisions that were set to expire at the end of the year for both businesses and individuals. One such provision that was extended was expensing for the film and television industry. The expensing provision was expanded to include live theater productions as well.
Expensing allows businesses to claim deductions for expenses paid in the year in which they were made, rather than having to take the deductions over a number of years. Through this, businesses are only taxed on their true profit, revenue minus costs. Under depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , businesses lose the ability to fully deduct the cost of an investment. This leads to an inaccurate representation of profit and increases the cost of capital.
Imagine a theater company that earns $1 million in a given year. It decides to spend $100,000 on new lighting equipment, a business investment. Under the current cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. system, the investment would be deducted over seven years according to a depreciation schedule. Over the course of the seven years, the deductions will add up to the $100,000 investment. However, when inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the time value of money are taken into account, only $83,630 is written off as a deduction.
If the theater could expense, it would be able to recover the full cost of the investment and would be the ideal treatment for business investment.
|
Depreciation Schedule of a 7-year Asset (MACRS) |
||
|
Year |
Write-off |
Present Value Write-off |
|
0 |
$ 14,290 |
$ 14,290 |
|
1 |
$ 24,490 |
$ 22,780 |
|
2 |
$ 17,490 |
$ 15,130 |
|
3 |
$ 12,490 |
$ 10,050 |
|
4 |
$ 8,930 |
$ 6,690 |
|
5 |
$ 8,920 |
$ 6,210 |
|
6 |
$ 8,930 |
$ 5,790 |
|
7 |
$ 4,460 |
$ 2,690 |
|
Total: |
$ 100,000 |
$ 83,630 |
|
Note: 5 percent real discount rate and 2.5 percent inflation |
The expensing provision that was extended last year under the PATH Act is up for renewal at the end of this year, and some have already set their sights on it. Rep. Tom Marino (R-PA), said, “If these guys aren’t bright enough to put anything together that makes money, tell them to get out of the business,” referring to the expensing provision.
It is true that the whole idea of extenders—tax policies that annually expire—is silly. It would be better to have permanent policy, even if it were not ideal policy. It is also not necessarily good policy to enact specific provisions by industry. However, it is important to distinguish between cost recovery provisions that move the code closer to the ideal of full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. and actual subsidies.
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