A proposed "Mass Asset Cost Recovery and Reinvestment System" discussion draft released by Senate Finance Committee Ranking Member Ron Wyden (D-OR) seeks to replace the current Modified Accelerated Cost Recovery System (MACRS) and Alternative Depreciation System (ADS) with a simplified pooled depreciation system under which assets would be assigned to pools based on their current MACRS property class assignments. Alternative depreciation calculations for the Alternative Minimum Tax and the determination of earnings and profits would be eliminated.

The Wyden plan would replace current depreciation rules under Internal Revenue Code Section 168(a)-(j) with a revised accelerated cost recovery system for "pooled property" (most tangible property and computer software) and a straight-line recovery system for "straight-line property" (residential rental property, nonresidential real property, water utility property, and railroad grading or tunnel bore). Collectively, the pooled property and straight-line property would constitute "Section 168 property" and would exclude motion picture films, video tapes, sound recordings, or public utility property if the taxpayer does not use a normalization method of accounting.

Under the Accelerated Mass Asset Cost Recovery and Reinvestment System (A-MACRRS), the remaining adjusted basis of all capital assets would be transferred into six pools that correspond to the current six MACRS accelerated depreciation classes. Each pool's balance would be increased by the amount of any assets placed in service assigned to each pool, and reduced by the proceeds of any asset dispositions from the pool and by previous depreciation deductions. At year-end, each final pool balance would be multiplied by its applicable recovery rate to determine the year's depreciation deductions.

The following table illustrates current classes and proposed pool rate assignments:

The Wyden draft is similar to a 2013 plan by former Finance Committee Chairman Max Baucus (D-MT) that proposed four asset pools. The Baucus cost recovery reform plan was included in a discussion draft with other accounting changes (one of a series of drafts addressing tax reform issues) that staff at the time indicated could raise roughly $700 billion over 10 years. A JCT revenue estimate of the Wyden plan indicated that the pool recovery rates were determined in order to maintain revenue neutrality over the budget window.

Senator Wyden's plan seeks to simplify what he said is an area of great complexity and to address the restriction prohibiting the Treasury Department from administratively updating class lives. According to summary documents, Senator Wyden believes the policies in the discussion draft will provide a basis for broader tax reform, but also that the proposals stand on their own merits.

Like-kind exchanges. Under the Wyden proposal, a like-kind exchange (as defined in Section 1031) of pooled property is considered to occur in the tax year that includes the earliest of: (1) the date that the taxpayer receives the replacement property, (2) the identification of the property to be received within 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or (3) the receipt of the property not more than 180 days after the date on which the original property is relinquished. Special rules are included for the case of a like-kind exchange of pooled property when the replacement property is not assigned to the same asset pool as the relinquished property. Further, the plan would simplify the current process under which a tax on gain above adjusted basis in an asset upon disposition is avoided via a like-kind exchange. Dispositions would no longer be subject to a recapture tax and the pool balance would simply be reduced by the amount of disposition proceeds.

The Wyden proposal would apply to tax years beginning after December 31, 2016; cost recovery provisions enacted in late 2015, including a five-year extension and expansion of bonus depreciation, would be preserved. Senator Wyden is asking for comments on all aspects of the discussion draft, other areas of cost recovery and capital investment, and the following specific topics:

— Transition rules

— Abandoned and certain low disposition value property

— Establishing a 100% pool for Section 179 property under the small business expensing rules

— Whether it is necessary to maintain the AMT if depreciation methods are unified

— Whether the like-kind exchange rules are necessary under a pooled depreciation system

— Broader interactions in the tax code

— Other simplification opportunities

Attached to this Alert are legislative text, a summary, and a one-pager on the proposal, as well as a JCT technical explanation and revenue estimate.

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ATTACHMENTS

Legislative text

Discussion draft

Summary of discussion draft

Barthold letter (JCT technical explanation)

Barthold memo (JCT revenue estimate)