Countries around the world are experiencing a sharp downturn in economic activity as an impact of the COVID-19 health crisis. To cushion the immediate liquidity effects of containment and mitigation policies, governments responded rapidly with emergency tax and fiscal policy measures. As these short-term measures are starting to expire, policymakers are increasingly looking at mid- and long-term fiscal policies to reignite economic growth when the pandemic subsides.
Capital investment plays an essential role here, as it is a key driver of economic growth. To spur capital investment during economic downturns, policymakers commonly use a tool referred to as accelerated 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. . Accelerated depreciation takes the form of bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially 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. or 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. (meaning 100 percent bonus depreciation) and is often a temporary policy.
Accelerated depreciation allows businesses to deduct more of their capital expenditures in the current year than the normal depreciation schedule would. Full expensing—equaling 100 percent bonus depreciation—allows businesses to write off the full capital expenditure in the first year. Accelerated depreciation increases the present value of depreciation deductions and thus improves the after-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. return on investment.
In other words, the tax costs on investments are reduced, providing an incentive to businesses to invest, which, in turn, leads to economic growth.
In recent months, several countries have introduced accelerated depreciation as a measure to incentivize private investment, including Australia, Austria, Germany, and New Zealand. There are various ways of how this policy has been implemented in the respective countries, largely depending on the existing standard depreciation schedules.
Australia was one of the first countries to introduce accelerated depreciation as part of its COVID-19 response. There are two key measures that apply to all businesses with revenues below AU $500 million (US $350 million), namely an instant asset write-off (full expensing) for depreciating assets that cost less than AU $150,000 (up from AU $30,000) and an accelerated depreciation deduction for all depreciable assets that are not eligible for the instant write-off.
The increase in the instant asset write-off threshold applies to new and secondhand assets installed between March 12, 2020 and December 31, 2020, excluding buildings and certain other assets. This temporary policy is available to all businesses with aggregate annual revenue of less than AU $500 million, up from the regular instant write-off threshold of AU $50 million. After December 31, 2020, the instant asset write-off will revert to a less generous form, with an aggregate turnover threshold of AU $10 million and a cost per asset threshold of AU $1,000.
The accelerated depreciation deduction applies from March 12, 2020 to June 30, 2021. Buildings, secondhand assets, and certain other assets are excluded. Australia has two depreciation schemes, the general depreciation rules and simplified depreciation rules, for small business entities (revenue up to AU $10 million). If a business operates under the general rules, it can claim an additional deduction of 50 percent of the asset cost in the first year, with existing depreciation rules applying to the balance of the asset’s cost. Businesses that use the simplified rules can claim 57.5 percent of the cost (rather than 15 percent) of the asset in the first year.
Austria has made changes to the way buildings and other assets, such as machinery, are depreciated. Businesses are now allowed to use the declining-balance method as an alternative to the straight-line method. The maximum declining-balance rate is 30 percent. This change applies to all assets purchased on or after July 1, 2020. Certain exceptions apply, including buildings, used assets, and certain intangible assets.
Since July 1, 2020, businesses can claim accelerated depreciation for buildings. In the first year in which the building is in use, the depreciation amount triples (from 2.5 percent to 7.5 percent for non-residential buildings and from 1.5 percent to 4.5 percent for residential buildings), and in the second year it doubles (5 percent for non-residential buildings and 3 percent for residential buildings). Starting the third year, it reverts to the regular straight-line schedule.
Germany’s second coronavirus relief package includes a provision to accelerate depreciation for movable assets, such as machinery, vehicles, and other business equipment. Movable assets purchased after December 1, 2019 and before January 1, 2022 can be depreciated using the declining-balance method, calculated by multiplying the previous straight-line depreciation rate by 2.5. The depreciation amount is capped at 25 percent of the initial asset cost. This is the same policy Germany introduced in 2009 and 2010 as a response to the Great RecessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. .
For instance, a business purchases a machine for $100,000 that is depreciable over eight years. Prior to the change in law, the annual capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. would have been 12.5 percent, or $12,500. Now, the straight-line depreciation rate of 12.5 percent is multiplied by 2.5, resulting in 31.25 percent or $31,250. Due to the 25 percent cap, the first-year depreciation is limited to $25,000. In the second year, the business can write off $23,437.50 ($75,000*31.25 percent).
New Zealand’s coronavirus response included two enhancements to capital 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. , namely the reintroduction of depreciation for commercial and industrial buildings with an estimated useful life of 50 years or more and an increase in the threshold for low-value assets that qualify for immediate write-off.
From the 2011-12 income year, depreciation was removed for residential and non-residential buildings with an estimated useful life of 50 years or more. From the 2020-2021 income year onwards, however, commercial and industrial buildings can again be depreciated at a rate of 2 percent using the declining-balance method or at 1.5 percent using the straight-line method. Residential buildings do not qualify for this change.
In addition, the threshold for low-value assets that can be expensed immediately was increased from NZ $500 (US $330) to NZ $5,000. This change applies to assets purchased between March 17, 2020 and March 16, 2021. Starting March 17, 2021, the threshold will be permanently increased from NZ $500 to NZ $1,000.
The strengthening of investment levels will be key in returning to a path of economic growth. Accelerated depreciation lowers the cost of capital investments through the tax code and can thus provide an important tool for governments to stimulate private investment. Australia, Austria, Germany, and New Zealand have already implemented accelerated depreciation, with more countries likely to follow.
Accelerated depreciation is often used as a stimulus tool during economic downturns, encouraging businesses to accelerate their capital spending plans to take advantage of the limited time frame in which this tax saving is offered. However, making accelerated depreciation—bonus depreciation or full expensing—permanent would permanently lower the cost of capital investments, making the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. generally more efficient.
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