PHOENIX - A new change in state tax law could encourage companies to stop putting off the purchase of new equipment.
The legislation provides instantaneous depreciation on state income tax forms for up to $500,000 worth of equipment. That is far better than the previous $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.
Rep. J.D. Mesnard, a Chandler Republican, said it's wrong to think of the move as a loss of revenue.
He said businesses already are able to depreciate everything they own and reduce their state tax liability. The only difference is how quickly that can occur, he said.
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 amount exceeding that $25,000 figure.
While the legislation officially does not take effect until mid-September, it applies 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.
Mesnard said the change will do more than simplify the tax-filing process.
"With any small businesses, we want them investing in the economy," but those decisions can be tempered by the tax benefits or lack thereof, he said. "This is something that will help. I think it will inspire them to go out and make those investments," he said.
The change also could make Arizona more competitive, said Steve Slivinski, an economist at the Goldwater Institute.
He said half of the other states in the country that have income taxes already conform their depreciation schedules with Section 179. That includes states with which Arizona competes, including Colorado, Utah and New Mexico. California, however, does not have the higher depreciation schedule.
The Arizona change 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 the 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.