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The United States is long overdue for a major tax reform bill. After eight years of economic weakness, we need a tax code that works for workers and job creators, not against them.
Our current tax code is strangling business growth, job creation, and higher wages. Our nation has the highest corporate tax rate in the developed world, putting American businesses at a competitive disadvantage in the global economy. Meanwhile, small businesses and family farms face high tax rates and other burdensome tax policies that make it difficult for them to expand and create new jobs.
The most important tax-related measures we can take to boost economic growth are lowering business tax rates and allowing businesses to recover their investments faster. This week, I'm introducing a tax bill in the U.S. Senate to address the second part of that equation. My bill, the Investment in New Ventures and Economic Success Today (INVEST) Act, focuses on helping small and medium-sized businesses by allowing them to recover their investments more quickly – in many cases expensing them immediately – thus freeing up capital to reinvest in the company.
The INVEST Act would allow new businesses to deduct a substantial part, if not all, of their startup costs within the first year. Currently, new businesses can only deduct $5,000 of these costs. My bill would substantially increase that amount to $50,000. This would significantly improve the stability of new businesses by freeing up cash they can use to grow. Plus, it would help encourage new business creation, an essential feature of a healthy economy.
A second part of my bill focuses on increasing cash flow for small and medium-sized businesses, farms, and ranches – in particular those that operate as corporations and partnerships – by allowing them to use cash accounting instead of accrual accounting. This would allow a business to be taxed on income when it receives the cash from the customer and to deduct an expense when it pays its supplier.
That means that businesses with inventories would be allowed to deduct investments in inventory up front, rather than having to wait until the inventory is sold, leaving them with more cash on hand to put back into their companies. It would also reduce the need for businesses to employ armies of lawyers and accountants to ensure that they've properly adhered to complex accounting rules.
Finally, the INVEST Act would substantially reform the depreciation and other expensing rules. Traditionally, farms and businesses have been forced to deduct expenses like machinery, property, or agricultural equipment over an extended period – anywhere from five to 10 years, and as much as 39 years for commercial buildings – which can leave a farm or business with its cash tied up for years in all the property it takes to run a successful enterprise.
My bill would permanently allow all businesses to deduct 50 percent of their investment in equipment, vehicles, machinery, and most other property during the year in which it is purchased. Small and medium-sized businesses would be allowed to immediately deduct 100 percent of new investments in business property up to $2 million.
For farmers and ranchers, who may reach the limit on full expensing, the bill substantially increases the rate at which they can depreciate the cost of tractors, combines, and other farm property. The bill also helps farms and businesses that rely on cars, light trucks, and vans by substantially increasing the amount they can deduct when investing in a new business vehicle.
Forcing business owners, farmers, and ranchers to lock up their capital for years or even decades, as our current tax code does, discourages growth and job creation. We need to free these individuals up as much as possible to redeploy that hard-to-raise capital back into business expansion, increased wages, and new jobs.
The weak economic growth of the past few years doesn't have to be the new normal, but full economic recovery is only possible if we remove the obstacles facing our nation's businesses. We need a tax code that works for American businesses, not against them.
I hope the INVEST Act will become an essential part of a broader tax reform package in the Senate that will help create the strong, sustainable growth Americans have been waiting for.Senator John Thune (R-SD) is chairman of the Senate Republican Conference, chairman of the Senate Committee on Commerce, Science, and Transportation, and No.3 in Senate Republican leadership. Follow him on Twitter @ SenJohnThune.