Bonus Depreciation Is the Tip of the Tax Iceberg

Tax managers will have their hands full working out bonus depreciation schedules, managing tight closes, and accounting for uncertain tax positions.
Marie LeoneApril 28, 2009

If critics were unsure whether the bonus depreciation deduction would prod companies into making capital investments during a recession, they can stop wondering. According to a new survey, half of the more than 500 CFOs polled claimed that their companies have used, or plan to use, the bonus depreciation deduction. Further, 25% of the respondents elected to accelerate research or alternative minimum tax credits in place of bonus depreciation.

The research, conducted by Grant Thornton, gathered responses from 530 chief financial officers and senior controllers.

The bonus depreciation deduction, which was passed in 2008 as part of the Economic Stimulus Act, was extended for another year in February, when the American Recovery and Reinvestment Act of 2009 was signed into law. It is aimed at encouraging companies to increase spending on major pieces of equipment by allowing them to accelerate the depreciation of long-lived or capital assets.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Specifically, companies are allowed to claim a deduction equal to 50% of the cost of a qualified asset. A qualified asset is a piece of capital equipment bought and put into service before Jan. 1, 2010. The deferred tax payments are spread out over the remaining life of the asset, starting in year two.

The CFOs that chose to accelerate tax credits likely made their decision in light of the sagging economy. “The large number of companies electing to accelerate credits is evidence that it’s been hard to make money in the down economy,” noted Allen Wilson, managing partner of Grant Thornton’s federal tax services practice. “The option to accelerate credits in place of bonus depreciation is particular helpful for businesses without income that wouldn’t be able take depreciation deductions.”

However, sorting out the new bonus depreciation rules won’t be the toughest issue corporate tax departments will face this year. In another survey, conducted by PricewaterhouseCoopers, 26% of the 800 tax managers who were polled said that meeting tighter closing deadlines is the “most serious challenge” related to tax accounting and reporting that tax department face.

Others saw the most serious challenge as tracking significant tax-law changes (19%), obtaining high-quality tax provision information from foreign subsidiaries (16%), and finding and retaining tax professionals with deep tax accounting experience (12%).

Tax managers will also be haunted by working their way through the economic downturn. For instance, 45% of respondents to PWC’s survey said current market conditions have complicated the calculation of the effective tax rate used to record their interim-period tax provision, with 19% claiming that they either don’t know or have not assessed the impact yet.

Also, one-third of the tax managers reckon that the estimated annual effective tax rate computation, as well as other issues related to accounting for taxes during interim periods, will be the “greatest concern” with respect to their company’s tax provisions. Other top concerns were valuation allowance assessments (23%) and accounting for uncertain tax positions (21%).