To amend the Internal Revenue Code of 1986 to increase expensing for small business and to allow small business to elect to determine the deduction for depreciation on a neutral cost recovery basis for property otherwise eligible to be expensed.

March 5, 2003

Mr. SMITH of Michigan (for himself, Mr. HOEKSTRA, Mr. EHLERS, and Mr. CAMP) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to increase expensing for small business and to allow small business to elect to determine the deduction for depreciation on a neutral cost recovery basis for property otherwise eligible to be expensed.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Neutral Cost Recovery Act for Small Business'.

SEC. 2. INCREASED EXPENSING FOR SMALL BUSINESS.

(a) IN GENERAL- Paragraph (1) of section 179(b) of the Internal Revenue Code of 1986 (relating to dollar limitation) is amended to read as follows:

`(1) DOLLAR LIMITATION- The aggregate cost which may be taken into account under subsection (a) for any taxable year shall not exceed $75,000. The dollar amount otherwise applicable under the preceding sentence for any taxable year shall be reduced by the basis of property which is placed in service during such year and which is taken into account under section 168(k).'.

(b) INCREASE IN PHASEOUT THRESHOLD- Paragraph (2) of section 179(b) of such Code (relating to reduction in limitation) is amended by striking `$200,000' and inserting `$325,000'.

(c) CERTAIN COMPUTER SOFTWARE- Paragraph (1) of section 179(d) of such Code (defining section 179 property) is amended to read as follows:

`(1) SECTION 179 PROPERTY- For purposes of this section, the term `section 179 property' means property--

`(A) which is--

`(i) tangible property (to which section 168 applies), or

`(ii) computer software (as defined in section 197(e)(3)(B)) which is described in section 197(e)(3)(A)(i) and to which section 167 applies,

`(B) which is section 1245 property (as defined in section 1245(a)(3)), and

`(C) which is acquired by purchase for use in the active conduct of a trade or business.

Such term shall not include any property described in section 50(b) and shall not include air conditioning or heating units.'.

(d) INFLATION ADJUSTMENT OF DOLLAR LIMITATION AND PHASEOUT THRESHOLD- Subsection (b) of section 179 of such Code is amended by adding at the end the following new paragraph:

`(5) INFLATION ADJUSTMENTS-

`(A) IN GENERAL- In the case of any taxable year beginning in a calendar year after 2003, the dollar amounts in paragraphs (1) and (2) shall each be increased by an amount equal to--

`(i) such dollar amount, multiplied by

`(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting `calendar year 2002' for `calendar year 1992' in subparagraph (B) thereof.

`(B) ROUNDING-

`(i) DOLLAR LIMITATION- If the amount in paragraph (1) as increased under subparagraph (A) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.

`(ii) PHASEOUT AMOUNT- If the amount in paragraph (2) as increased under subparagraph (A) is not a multiple of $10,000, such amount shall be rounded to the nearest multiple of $10,000.'.

(e) REVOCATION OF ELECTION- Paragraph (2) of section 179(c) of such Code (relating to election irrevocable) is amended to read as follows:

`(2) REVOCATION OF ELECTION- The taxpayer may revoke an election under paragraph (1), and any specification contained in any such election, with respect to any property. Such revocation, once made, shall be irrevocable.'.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2002.

SEC. 3. NEUTRAL COST RECOVERY DEPRECIATION ADJUSTMENT FOR CERTAIN PROPERTY PLACED IN SERVICE AFTER DECEMBER 31, 2003.

(a) IN GENERAL- Section 168 of the Internal Revenue Code of 1986 (relating to accelerated cost recovery system) is amended by adding at the end thereof the following new subsection:

`(k) DEDUCTION ADJUSTMENT TO ALLOW EQUIVALENT OF EXPENSING FOR CERTAIN PROPERTY PLACED IN SERVICE AFTER DECEMBER 31, 2003-

`(1) IN GENERAL- In the case of property placed in service after December 31, 2003, that the taxpayer would (but for the second sentence of section 179(b)(1)) be eligible to fully expense under section 179, the deduction under this section with respect to such property--

`(A) shall be determined by substituting `150 percent' for `200 percent' in subsection (b)(1) in the case of property to which the 200 percent declining balance method would otherwise apply, and

`(B) for any taxable year after the taxable year during which the property is placed in service shall be--

`(i) the amount determined under this section for such taxable year without regard to this subparagraph, multiplied by

`(ii) the applicable neutral cost recovery ratio for such taxable year.

`(2) APPLICABLE NEUTRAL COST RECOVERY RATIO- For purposes of paragraph (1)--

`(A) IN GENERAL- The applicable neutral cost recovery ratio for the property for any taxable year is the number determined by--

`(i) dividing--

`(I) the gross domestic product deflator for the calendar quarter ending in such taxable year which corresponds to the calendar quarter during which the property was placed in service by the taxpayer, by

`(II) the gross domestic product deflator for the calendar quarter during which the property was placed in service by the taxpayer, and

`(ii) then multiplying the number determined under clause (i) by the number equal to 1.035 to the nth power where `n' is the number of full years in the period beginning on the 1st day of the calendar quarter during which the property was placed in service by the taxpayer and ending on the day before the beginning of the corresponding calendar quarter ending during such taxable year.

The applicable neutral cost recovery ratio shall never be less than 1. The applicable neutral cost recovery ratio shall be rounded to the nearest 1/1000 .

`(B) SPECIAL RULE FOR CERTAIN PROPERTY- In the case of property described in paragraph (2) or (3) of subsection (b) or in subsection (g), the applicable neutral cost recovery ratio shall be determined without regard to subparagraph (A)(ii).

`(3) GROSS DOMESTIC PRODUCT DEFLATOR- For purposes of paragraph (2), the gross domestic product deflator for any calendar quarter is the implicit price deflator for the gross domestic product for such quarter (as shown in the first revision thereof).

`(4) ELECTION NOT TO HAVE SUBSECTION APPLY- This subsection shall not apply to any property if the taxpayer elects not to have this subsection apply to such property. Such an election, once made, shall be irrevocable.

`(5) CHURNING TRANSACTIONS- This subsection shall not apply to any property if this section would not apply to such property were subsection (f)(5)(A)(ii) applied by substituting `2004' for `1981' and `2003' for `1980'.

`(6) ADDITIONAL DEDUCTION NOT TO AFFECT BASIS OR RECAPTURE-

`(A) IN GENERAL- The additional amount determined under this section by reason of this subsection shall not be taken into account in determining the adjusted basis of any property or of any interest in a pass-thru entity which holds such property and shall not be treated as a deduction for depreciation for purposes of sections 1245 and 1250.

`(B) PASS-THRU ENTITY DEFINED- For purposes of subparagraph (A), the term `pass-thru entity' means--

`(i) a regulated investment company,

`(ii) a real estate investment trust,

`(iii) an S corporation,

`(iv) a partnership,

`(v) an estate or trust, and

`(vi) a common trust fund.'

(b) MINIMUM TAX TREATMENT-

(1) Paragraph (1) of section 56(a) of such Code is amended by adding at the end thereof the following new subparagraph:

`(E) USE OF NEUTRAL COST RECOVERY RATIO- In the case of property to which section 168(k) applies and which is placed in service after December 31, 2003, the deduction allowable under this paragraph with respect to such property for any taxable year (after the taxable year during which the property is placed in service) shall be--

`(i) the amount so allowable for such taxable year without regard to this subparagraph, multiplied by

`(ii) the applicable neutral cost recovery ratio for such taxable year (as determined under section 168(k)).

This subparagraph shall not apply to any property with respect to which there is an election in effect not to have section 168(k)) apply.'

(2) Subparagraph (C) of section 56(g)(4) of such Code is amended by adding at the end the following new clause:

`(v) NEUTRAL COST RECOVERY DEDUCTION- Clause (i) shall not apply to the additional deduction allowable by reason of section 168(k).'

(c) COORDINATION WITH DEPRECIATION LIMITATION ON CERTAIN AUTOMOBILES- Clause (i) of section 280F(a)(1)(B) of such Code is amended by adding at the end the following new sentence: `For purposes of this clause, the unrecovered basis of any passenger automobile shall be treated as including the additional amount determined under section 168 by reason of subsection (k) thereof to the extent not allowed as a deduction by reason of this paragraph for any taxable year in the recovery period.'

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after December 31, 2003.

END