How Does Section 179 Expensing Impact State Individual ...years (the asset life time). § Each year...

HowDoesSection179ExpensingImpactStateIndividualIncomeTaxRevenue:a

CaseofIowa

[email protected]

IowaDepartmentofRevenueFTARevenueEstimationandTaxResearchConference

September25,2017Disclaimer: The views expressed here are those of the author and do notnecessarily represent the views of, and should not be attributed to, IowaDepartment of Revenue.

Note: This project is in preliminary stages. Suggestions are welcome andencouraged.

MotivationØ Section179deductionclaimedbyfarmersandsmall

businessesimpactsIowastaterevenue.Ø IowahascoupledwithenhancedfederalSection179taxyears

2010through2015,butnotcoupledbeginningtaxyear2016.Ø Thepurposeoftheprojectistoimproveforecastofrevenue

impactifIowacoupleswithfederalSection179limitsinthefuture.

FTA2017 Section179Expensing 1

OutlineØBriefBackgroundØ1.Distributionofclaimsamongindividualtaxpayers§ Farmers§ ScheduleEfilers(rental,Scorps,partners,etc.)§ ScheduleCfilers(soleproprietors)

Ø2.Take-upratesofthedeductionØ3.EstimatedfiscalimpactsØPlannedfuturework


ScopeofthisAnalysisØSection179expensingonly

§ “bonusdepreciation”isnotdiscussedØ Individualincometaxpayersonly

§ ForScorpsandpartnerships:Partnersorshareholderslevel,notentitylevel§ Ccorpsareexcluded

Ø Iowaresidentsonly§ Nonresidentsareexcluded

ØElectronicfilersonly§ Paperfilersareexcluded

*Withoutspecialnotification,statisticsreportedhereareforIowaresidentselectronicfilersonly.


WhatisSection179Expensing?ØDepreciation:Whenabusinesspurchasesassets,thecostsofassetscanbedeductedoveranumberofyears(theassetlifetime).§ Eachyeartheshareofthecostoftheassetscanbedeductedasdepreciation(MACRS).

Ø Section179expensingallowstaxpayerstodeductthefullcostsofcertainassetsinthefirstyearputinservice,i.e.,“expensing”thecostfullyinthefirstyear,uptoalimit.§ themostacceleratedformofdepreciation


BenefitsofSection179ExpensingforTaxpayers

ØReducingthecostoftheassets§ Increasingnetpresentvalueofdepreciationallowance(looselyspeaking)

§ Loweringthemarginaleffectivetaxrate(HallandJorgenson,1967)(theoretical)

ØCashflowbenefits§ Increasingcashflowinthefirstyear

ØEliminatingdepreciationrecordkeepingrequirements


FederalSection179DeductionhasbeenExpanding

Ø Section179deductionwasenactedin1958toreducethetaxburdenonsmallbusinessowners.

ØDecember2015ThePATHActpermanentlyextendedanenhanced“Section179”deduction($500K/$2millionandindexed)for2015andbeyond.


ParametersofSection 179DeductionØFederal:deduction iscappedby

§ Dollarlimitationpertaxpayer($500,000for2016)§ Investmentphase-out threshold ($2,010,000for2016)§ Businessincomelimit

Ø Iowa:deduction iscappedby§ Dollarlimitationpertaxpayer($25,000for2016)§ Investmentphase-out threshold ($200,000for2016)§ Businessincomelimit§ ThefederaldeductionamountdisallowedduetoIowade-couplingcanbedepreciatedusingMACRS**exceptforpass-throughpartnersorshareholders


DataSourcesØDatasources:

§ Individual-levelIRSandIowaIndividualTaxReturns(Form1040)

§ Individual-levelIRSandIowaDepreciationandAmortization(Form4562)• Section179expensing• Bonusdepreciation• MACRS

Ø Timeperiod:TY2012-TY2016§ Limitationofdatabefore2012§ 2016dataarepreliminary


I.DistributionamongIndividuals


DefinitionsofIndividualTaxpayersTypesØSchedulesforindividualstoreportdepreciation:

§ ScheduleF:farming§ ScheduleE:rental,royalties,Scorps,partnerships,estates,trusts,etc.

§ ScheduleC: SoleproprietorshipbusinessØThereissomeoverlapbetweenthesefilers.Therefore,thecategoriesusedhereareasfollows:§ Farmers:anyonewhofiledScheduleF§ ScheduleEfilers:whofiledScheduleEbutnotScheduleF§ Soleproprietors:whofiledScheduleCbutnotincludedintheabovetwocategories


YearCharacteristics:TY2012-TY2016


Ø TY2012wasabigyearforvariousincomesources.AnnualGrowthRatesofIncomeorEconomicStatisticsforIowa

TaxYearTaxableFarm

IncomeScheduleEIncome

SoleProprietorsIncome GDP

PersonalIncome

2011 42% 15% 6% 5% 8%2012 77% 26% 9% 6% 5%2013 -28% -2% -1% 3% 2%2014 -47% 5% 5% 5% 3%2015 -73% 0% 4% 4% 4%2016 -109% 0% 0% 2% 2%

DistributionoffederalSection179DeductionacrossIndividualTypes


Ø Farmersaccountedfor53%-73%ofthetotalamountofSection179deductionclaimedbyIowaindividualtaxpayers.

TY2012 TY2013 TY2014 TY2015 TY2016* TY2012 TY2013 TY2014 TY2015 TY2016*

MillionofDollarsFarmers $1,979 $1,937 $1,370 $1,037 $775 73% 71% 62% 55% 53%

ScheduleEfilers $630 $706 $711 $729 $592 23% 26% 32% 39% 41%

SoleProprietors $95 $99 $114 $112 $93 4% 4% 5% 6% 6%

Totals $2,705 $2,742 $2,195 $1,878 $1,459 100% 100% 100% 100% 100%

*TY2016isincomplete.

Section179Deductionon

FederalReturns Distribution

USDA’sFarmClassificationØResidencefarms:

§ Lessthan$350,000ingrosscashfarmincome§ Principaloperatoriseitherretiredorhasaprimaryoccupationotherthanfarming

ØIntermediatefarms:§ Lessthan$350,000ingrosscashfarmincome§ Principaloperatorwhoseprimaryoccupationisfarming

ØCommercialfarms:§ Farmswith$350,000ormoregrosscashfarmincomeandnonfamilyfarms


DistributionoffederalSection179DeductionAcrossIndividualTypes


RelativeDistributionofSection179DeductionsAcrossIndividualTypesTY2012 TY2013 TY2014 TY2015 TY2016* TY2012 TY2013 TY2014 TY2015 TY2016*

Farmers MillionofDollarsGrossincome<$350K $620 $586 $508 $461 $374 31% 30% 37% 44% 48%$350K<Grossincome<$1M $843 $767 $496 $348 $259 43% 40% 36% 34% 33%Grossincome>=$1M $516 $584 $367 $228 $142 26% 30% 27% 22% 18%

ScheduleEfilersGrossincome<$350K $510 $562 $549 $524 $435 81% 80% 77% 72% 73%$350K<Grossincome<$1M $72 $87 $98 $123 $99 11% 12% 14% 17% 17%Grossincome>=$1M $48 $57 $63 $83 $58 8% 8% 9% 11% 10%

SoleProprietorsGrossincome<$350K $73 $76 $82 $83 $73 76% 76% 72% 74% 79%$350K<Grossincome<$1M $16 $17 $21 $20 $14 16% 17% 19% 18% 15%Grossincome>=$1M $7 $7 $10 $9 $6 7% 7% 9% 8% 6%

TotalsGrossincome<$350K $1,203 $1,223 $1,139 $1,068 $882 44% 45% 52% 57% 60%$350K<Grossincome<$1M $930 $872 $615 $490 $372 34% 32% 28% 26% 26%Grossincome>=$1M $571 $647 $440 $320 $206 21% 24% 20% 17% 14%

*TY2016isincomplete.

Distribution

II.Take-UpRates


U.S.EstimationbyKitchenandKnittel (2016)Ø KitchenandKnittel (2016)focusesonU.S.business

taxpayersØ SOIdatafromIRS,2002-2014Ø 𝑇𝑎𝑘𝑒 − 𝑢𝑝𝑟𝑎𝑡𝑒 = ,-./0123456-67./012

89:0:1;9<<-<0=0><-?@1?-@/0-:

Ø ReplicatetheirmethodofcalculatingSection179propertyeligiblebasis:§ ReportedcappedSection179deductionamount§ Reportedbonusdepreciationamount§ ReportedMACRS basicsofpropertieswith20yearsorlessrecoveryperiod

§ Imputedsoftwarebasis(otherdepreciation*16%)§ Reportedcarryover amountofSection179fromprioryears


Section179Take-UpRates:IowaIndividualsAllTypes


IowaIndividualTaxpayersSection179Take-UpRates(ResidentsOnly)AllIndividuals TY2012 TY2013 TY2014 TY2015 TY2016*NumberofIndividualFilersNumberwitheligible179basis 123,184 124,063 122,510 116,606 105,443Numberclaiming179deduction 77,997 76,315 74,082 67,753 58,122Take-uppercentage(usingnumber)Relativetoeligiblebasis 63% 62% 60% 58% 55%

Millionsofdollars

Totalbasiseligiblefor179 $4,888 $4,950 $4,294 $4,017 $3,368Total179deductionclaimed $2,718 $2,755 $2,209 $1,891 $1,473Take-uppercentage(usingamount)Relativetoeligiblebasis 56% 56% 51% 47% 44%

DataSource:IowaresidentsIRSForm1040and4562.*TY2016isincomplete.

Section179Take-UpRates:IowaIndividualsAllTypesComparedtoUnitedStates,TY2014


IowaIndividualTaxpayersSection179Take-UpRates(ResidentsOnly)AllIndividuals TY2012 TY2013 TY2014 TY2015 TY2016* TY2014

NumberofIndividualFilers IowaU.S.

(Kitchen&Knittel,2016)Numberwitheligible179basis 123,184 124,063 122,510 116,606 105,443Numberclaiming179deduction 77,997 76,315 74,082 67,753 58,122Take-uppercentage(usingnumber)Relativetoeligiblebasis 63% 62% 60% 58% 55% 57%

Millionsofdollars

Totalbasiseligiblefor179 $4,888 $4,950 $4,294 $4,017 $3,368Total179deductionclaimed $2,718 $2,755 $2,209 $1,891 $1,473Take-uppercentage(usingamount)Relativetoeligiblebasis 56% 56% 51% 47% 44% 48%


IowaSection179Take-UpRates:Farmers


Table1F.IowaIndividualTaxpayersSection179Take-UpRates(ResidentsOnly)Farmers(ScheduleEfilers) TY2012 TY2013 TY2014 TY2015 TY2016*NumberofFarmersNumberwitheligible179basis 51,615 51,516 49,883 47,933 44,951Numberclaiming179deduction 35,779 33,666 31,441 27,942 24,403Take-uppercentage(usingnumber)Relativetoeligiblebasis 69% 65% 63% 58% 54%

Millionsofdollars

Totalbasiseligiblefor179 $3,630 $3,590 $2,895 $2,536 $2,140Total179deductionclaimed $1,979 $1,937 $1,370 $1,037 $775Take-uppercentage(usingamount)Relativetoeligiblebasis 55% 54% 47% 41% 36%


Decliningfarmincome

FactorsAssociatedwithSelectingSection179ExpensinginLiterature

ØKitchenandKnittel (2016)§ Stateconformity(+)§ Losssituation(-)§ Netoperatingloss(-)§ Largergrossreceipts(+)§ Longerassetlife(+)§ Manufacturingandminingfirms(+)

ØRiskofrecapturedDepreciation(-)


Cross-SectionalSampleStatisticalDescription


OnlythosewhohadeligibleSection179basisareincludedinthesampleTY2012-TY2014.

Averageinsample Farmers ScheduleEFilers SoleProprietors

SelectingSection179deduction(1=yes,0=no) 62% 57% 59%

Bonusdepreciationindicator(1=yes,0=no) 8% 9% 8%Mortgageorinterestpaidindicator(1=yes,0=no) 68% 26% 31%Averageassetlife(years) 9.1 8.2 7.0Grossincome(Million$) 0.28 0.10 0.08Lossindicator(1=yes,0=no) 50% 23% 31%

NumberofObservations 239,907 173,889 106,025McFadden'sR2 0.143 0.175 0.098MeanofDependentVariable 0.623 0.572 0.587

Cross-SectionalProbit EstimationforSelectingSection179Deduction(FarmersOnly)


DependentVariable:SelectingSection179deduction=1;else=0

IndependentVariables Coeffeicent StandardErrorLossindicator(1=yes,0=no) -1.053 0.006Bonusdepreciationindicator(1=yes,0=no) -0.340 0.010Averageassetlife(years) 0.011 0.001Grossincome(Million$) 0.051 0.003Mortgageorinterestpaidindicator(1=yes,0=no) 0.225 0.006

Yeareffect? Yes

NumberofObservations 239,907McFadden'sR2 0.143MeanofDependentVariable 0.623

Farmers

III.EstimatedFiscalImpacts


*Paperfilersareimputedandnonresidentsareincluded.

FiscalImpactofIowaCouplingFederalSection179Permanently


Paperfilersareimputedandnonresidentsareincluded.

EstimatesUnderProposalsRaisingIowa’sSection179Limits


Proposal

ProposedIowaDollar

Limitation

ProposedIowaPhaseOutThreshold

TotalImpactTY2018(Million$)

TotalNumberofTaxpayerswith

LowerTaxLiability

ShareofFarmerswithLowerTax

LiabilitybyNumber

ShareoftheImpactonFarmersbyDollarAmount

A $50,000 $200,000 -$17.3 17,022 48% 49%B $100,000 $400,000 -$35.6 17,457 49% 49%C $250,000 $1,000,000 -$52.4 17,561 49% 46%D $520,000 $2,070,000 -$67.3 17,571 52% 44%

CurrentIowaSection179deductionhasdollarlimitationat$25,000andphasedoutthresholdat$200,000.Paperfilersareimputedandnonresidentsareincluded.

PlannedFutureWorkØAddthefollowingparts:

§ Examinefurtherabouttaxpayersinvestmentbehaviorunderlawchanges• Usingpaneldatastructure• Usinginformationoneachproperty

§ Estimateproposalsonpass-throughamountexceedingIowalimitsforshareholdersandpartners• Currentlaw:“loseit”• Proposals:allowingMACRSorallowingcarryforward


SummaryØ Farmersaccountedfor53%-73%ofthetotalSection179deductionamountclaimedbyIowaindividualtaxpayers.

Ø Iowafarmer’sSection179take-uprateisassociatedwith§ lossposition(-)§ claimingbonusdepreciation(-)§ averageassetlifeyears(+)§ grossincome(+)§ payingmortgage(+)

Ø FiscalimpactofIowacouplingfederallawreflectsthetimingpatternofaccelerateddepreciation.


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