codykallen
commented
5 years ago On an additional note, I think it may be worthwhile to provide an overview of depreciation laws. The current-law rules for capital cost recovery, known as MACRS, provides two systems for deducting investment costs: the general depreciation system (GDS) and the alternative depreciation system (ADS). Each of these systems proscribes certain methods for capital cost recovery for each asset type. These methods are double-declining balance depreciation, 150% declining balance depreciation, straight-line depreciation, expensing, and economic depreciation. GDS uses all of these methods for various asset types; ADS only uses straight-line depreciation.
In addition to these systems, various proposals have recommended two other systems: expensing and economic depreciation. In that sense, expensing is both a depreciation system and a depreciation method; in the expensing system, the expensing method is used for all asset types. The same logic applies for economic depreciation.
In light of this, we should consider how to clarify and improve the implementation of depreciation rules. First, the policy parameter names, such as depr_5yr_method are misleading; these really mean the system to use for depreciating.
Furthermore, when building the Asset class from its previously poorly structured form, I dropped expensing as a depreciation system. At the time, I had been thinking that one could just as implement expensing by setting the bonus depreciation rate to 100%. However, there is a subtle distinction that makes this inaccurate. Bonus depreciation is optional, and it has a take-up rate below 100%. On the other hand, expensing is not optional; the deduction is taken immediately. The incomplete take-up of bonus depreciation isn't properly modeled in the Asset class yet, so this distinction doesn't alter results at this stage. However, this should still be rectified or addressed somehow.
@martinholmer, does this clear up any confusion on the handling of depreciation systems and methods?
martinholmer
One of the trickiest potential areas when dealing with policy parameters is how to design policy parameters to allow for flexible changes to depreciation rules without having too many parameters, as to make it unreasonably difficult.
When building this model, I generally followed the approach in CCC, which allows for changes based on class lives, with depreciation policy parameters tied to the class life. However, this approach doesn't allow for changes to the life, which is important for potential policy changes. For example, an early version (although not the final version) of the TCJA planned to reclassify the 39.5 year class (nonresidential structures) as 25 year property. One could also want to make changes to the tax rules for specific asset types, without altering the rules for other assets with the same class life.
A previous version of Business-Taxation had reform parameter
reclassify_gds_lifeandreclassify_ads_life, which allowed for changing the lives from one length to another (e.g. 39.5 years to 25 years). But handling this was cumbersome, and it would not be applicable in thePolicyclass as currently structured.Perhaps it would be useful to have 2 types of reforms. One would be a standard reform dictionary (as currently done in Tax-Calculator), and the other would be specific to depreciation rules, allowing for changes by class life, by specific asset type, and by minor asset class.