A new change in state tax law could encourage companies to stop putting off the purchase of new equipment.
The legislation provides instantaneous depreciation for up to $500,000 worth of equipment on state income tax forms. That is far better than the $25,000 limit in state law.
Lawmakers and Gov. Jan Brewer approved the change despite estimates that it will reduce state revenues this budget year by about $25 million.
But Rep. J.D. Mesnard, R-Chandler, said it's wrong to think of the move as a loss of revenues.
He said businesses already are able to depreciate everything they own and reduce their state tax liability. The only difference, Mesnard said, is how quickly that can occur.
Virtually all equipment purchased by companies, individuals and partnerships is a business expense. And, generally speaking, those expenses are deducted from a firm's income to come up with the figure used to determine state income tax liability.
But state and federal law also conclude that equipment has a useful life. And businesses are supposed to allocate the cost over that useful life -- essentially the depreciation schedule.
In 2003, however, federal law was amended to allow firms to write off the entire amount, up to certain limits. That currently is $500,000 a year in new purchases.
Arizona law, however, has been stuck at $25,000.
What that means, from a practical standpoint, is businesses that take the accelerated federal depreciation, known as Section 179 of the Internal Revenue Code, then have to refigure their Arizona taxes to put back in any expense exceeding that $25,000 figure.
Mesnard said the change will do more than simplify the tax-filing process.
"With any small businesses, we want them investing in the economy,'' he said. But Mesnard said those decisions can be tempered by the tax benefits or lack thereof.
"This is something that will help,'' he said.
Steve Slivinski, an economist at the Goldwater Institute, said the change also could make Arizona more competitive.
He said half of the other states in the country which have income taxes already conform their depreciation schedules with Section 179. Slivinski said that includes states with which Arizona competes, including Colorado, Utah and New Mexico.
California, however, does not have the higher depreciation schedule.
It took some convincing to line up the votes. And much of the concern was that immediate loss of state revenues as companies boosted their deductions and, in turn, reduced their income tax liability.
Mesnard said that concern is looking at the issue the wrong way.
"It is not a permanent cost to the state,'' he said.
"The way depreciation works is you recoup those costs over time'' as a business, Mesnard explained.
"We're allowing them to recoup it immediately,'' he continued. "So while there's a $20 million hit here, all of it is recouped.''
And while the state will be out the money up front, Mesnard said it should provide a boost to small business.
"I think it will inspire them to go out and make those investments,'' he said.
While the legislation officially does not take effect until mid-September, it is crafted to apply retroactively to the first of the year. That means any and all purchases made since Jan. 1 can fit under the new $500,000 instant depreciation.
But businesses cannot accelerate depreciation on items they already had on hand at the end of last year.
The change, however, may not be permanent.
In essence, the new law simply conforms Arizona's depreciation schedule to Section 179. But legislative budget staffers pointed out that higher limit in federal law is scheduled to decrease to $25,000 beginning with the 2014 tax year.
That means if Congress does not extend the accelerated deduction, Arizona's own instant depreciation would once again be back at the $25,000 level.