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Current Tax Law and Economics of Industrial Projects

John H. Ristroph, Martha F. Glassinger University of Louisiana at Lafayette / Harry V. Barton, CPA, LLC

Introduction

Income taxes play a major role in the economics of industrial projects, but tax laws fre- quently change, so bringing current material into the classroom can be difficult. Nonetheless, only teaching basic principles and requiring students to learn tax regulations on their own leaves a void, for understanding regulations can be a difficult challenge. An alternative to this is to teach principles using today's laws, or minimally to explain any changes from classroom presen- tations and provide handouts. This strategy motivates students to learn something that they can use, and it exposes them to realities of interpreting and implementing regulations.

This paper reviews current legislation insofar as it impacts the taxation of engineering projects. Its objective is to keep professors up-to-date and to provide optional reading for stu- dents (via http://engrecon.home.att.net), rather than to present a more comprehensive treatment of taxes available elsewhere [1, 2, 3]. The paper’s coverage includes major modifications to the tax code, such as those involving the depreciation of business use assets under the Modified Ac- celerated Cost Recovery System (MACRS) and expensing the cost of business use assets under Internal Revenue Code Section 179, as well as routine ones, such as deductions, exemptions, and tax brackets. The final topic clarifies when the commonly used assumption of treating gains or losses on disposal as ordinary income is acceptable. This is particularly relevant to smaller or- ganizations that operate as pass-through entities, where capital gains provisions can differ sharply from corporate regulations.

MACRS

MACRS was enacted as part of the Tax Reform Act of 1986. It classifies property into two general categories, intangible and tangible. Intangible property includes items such as soft- ware, copyrights, or patents. It is depreciated using the straight- line (SL) method. Tangible prop- erty is anything that can be seen or touched, such as a project’s buildings or equipment, but ex- cluding (for depreciation purposes) land and inventory held for sale. There are two categories of tangible property, real and personal. Real refers only to buildings (since land itself is non- depreciable), and personal is everything else. Real property continues to use the SL depreciation methods set forth by MACRS, but changes have occurred for personal property. The General Depreciation System of MACRS originally provided depreciation of per- sonal property using the declining balance (DB) method of depreciation with an optimal switch to SL in the year t,

Proceedings of the 2004 American Society for Engineering Education Annual Conference & Exposition Copyright © 2004, American Society for Engineering

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Glassinger, M., & Ristroph, J. (2004, June), Current Tax Law And Economics Of Industrial Projects Paper presented at 2004 Annual Conference, Salt Lake City, Utah. 10.18260/1-2--14084