A Tax Foundation analysis warns that the scheduled phaseout of 100% bonus depreciation will increase the cost of investment in the U.S.
The 2017 Tax Cuts and Jobs Act permitted a 100% bonus depreciation deduction for assets with useful lives of 20 years or less. However, bonus depreciation was enacted on a temporary basis and is scheduled to drop by 20 percentage points per year beginning in 2023 until it fully phases out after the end of 2026.
Businesses determine their profits by subtracting costs from revenue. But for the purposes of calculating taxable income, the tax code does not treat capital costs the same as other ordinary business costs such as paying utility bills or workers’ wages. Instead, depreciation schedules specify how assets can be deducted over time.
For example, if a business purchases a piece of manufacturing equipment with an expected useful life of 20 years, it can write off 100% of the asset’s cost in the year it was purchased rather than spreading those deductions out over the 20-year period during which the usefulness and value of the asset will steadily decline. This can reduce the business’s taxable income in the year the asset was purchased. On the other hand, if deductions are not permitted immediately, inflation and factors like wear and tear can erode the value of the equipment over time while its depreciation schedule remains based on the original purchase price.
The Tax Foundation analysis argues that allowing the phaseout to happen will discourage otherwise productive domestic investment, creating an impediment to productivity enhancements and opportunities for businesses and workers. Instead, the authors recommend making the 100% bonus depreciation a permanent feature of the tax code.
The analysis indicates that making the bonus depreciation permanent would increase long-run economic output by 0.4%, the capital stock by 0.7% and employment by 73,000 full-time equivalent jobs. It would reduce federal revenue by $400 billion over the 10-year budget window. Read the full analysis.