Property Accounting and Guideline Depreciation
by JACK MACY Partner, Chicago Office
Presented before the Second Annual Arkansas Tax Institute, Little Rock, Arkansas — November 1963
THERE have probably been no recent developments in the tax field with greater effect on business tax planning than those relating to property accounting and depreciation.
The rules which have been established are sufficiently new and still sufficiently in flux so that our understanding both of where we are and of where we may possibly be expected to go from here can be helped by a brief review of the background out of which some of these changes have arisen.
As you know, there has been for some time a demand in business and professional circles for depreciation reform. Partly this demand has grown out of exasperation with time-consuming and inconclusive
arguments with Revenue Agents over small rate adjustments. Perhaps more fundamentally we have been conscious that the processes
of inflation remove a substantial part of the value of a deduction
which is deferred. If the expenditure was made years ago when cost was greater in terms of real value than at the time it is recovered for tax purposes, the effect obviously is a failure to recover real cost for tax purposes. While this problem cannot be fully met without some application of price-level depreciation, it is apparent that any acceleration of depreciation reduces the problem by lessening the time for inflation to act between the expenditure and the deduction.
Rather recently we have also become aware that most European countries have more liberal capital recovery programs for tax purposes
than we have. Some countries grant large initial allowances; others provide for arbitrary determination of short useful life; and there has also been some recognition of price-level changes. It has been believed that these more liberal rules have encouraged modernization
of plant relative to our own and that our less favorable provisions have tended to worsen our competitive position.
In view of these factors the Treasury some time ago made a survey of depreciation practices used by a number of rather large