Clarification of Tax Bill Compromise to Permit Immediate Expensing of Machinery and Equipment

            On December 8, we sent you an all-client letter warning you about potential effective date restrictions with respect to one element of the tax cut compromise being considered by Congress, which would permit immediate expensing of the cost of new machinery and equipment placed in service in 2011.

            In fact, the draft language of the bill currently being considered in the Senate is considerably broader than what could reasonably have been anticipated.  Under the draft language in the pending bill, property placed in service after September 8, 2010, and no later than December 31, 2011, qualifies for the immediate expensing provision.  Thus, property placed in service during the latter part of 2010 may qualify for immediate expensing.  The September 8 effective date apparently is based on the date of the Obama Administration’s original announcement of the idea for this expensing proposal.

            In addition, binding contract provisions resembling those in existing Code section 168(k) are intended to apply.  While the language in the bill suggests that the binding contract rules would deny immediate expensing for any property placed in service pursuant to a binding contract entered into prior to the September 8, 2010, effective date of the provision, that is apparently not the approach which will be adopted.  A recently-released Joint Committee explanation of the pending bill provides that the binding contract effective date is January 1, 2008, rather than September 8, 2010.  Thus, under the Joint Committee explanation, a taxpayer placing property in service after September 8, 2010, and prior to December 31, 2011, pursuant to a binding contract entered into on or after January 1, 2008, would be eligible for immediate expensing.  We discussed this surprising interpretation informally with the Treasury Department and they confirmed that the Joint Committee explanation is correct and that a very liberal transition rule is intended.

Leslie J. Schneider

Patrick J. Smith