Making Bonus Expensing Permanent

May 7, 2014

Bonus expensing is not a corporate giveaway -- it is a tax provision that corrects undercounting and allows businesses to report their incomes more accurately, writes William McBride, chief economist at the Tax Foundation.

Currently in front of Congress is a tax extenders bill -- a set of 50 tax provisions that regularly expire and must be renewed. One of these provisions is what is known as "bonus expensing."

When businesses make investments, they are not allowed to deduct that investment expense all at once. Instead, the expenses are delayed and gradually deducted over a number of years, depending upon the asset at issue and the particular industry. Bonus expensing, however, allows businesses to avoid the usual depreciation procedure.

  • The bill that Congress is considering would allow businesses to deduct immediately 50 percent of their investment in equipment and software, with the remaining 50 percent being deducted according to the usual depreciation system.
  • Any investments that take more than 20 years to be written off would not be eligible for bonus expensing, nor would investment in structures.

Bonus expensing, therefore, allows businesses to report their incomes more accurately because they can deduct a larger portion of their expenses upfront. 

McBride argues that the 50 percent bonus expensing provision should be permanently extended, finding that it would increase gross domestic product (GDP) by more than 1 percent, increase capital stock by more than 3 percent, raise wages by 1 percent, and would create 212,000 jobs.

  • Low-income Americans would benefit most from bonus expensing, as it would increase the after-tax income of those earning less than $40,000 by more than 1 percent, while those earning more than $40,000 would see less than a 1 percent growth in their income.
  • The federal government would see a corresponding increase in tax revenue of $23 billion annually.

While many tax extender provisions are special interest legislation and should expire, bonus expensing is not one of them. Making the provision permanent would bring GDP growth, increase wages and create jobs.

Source: William McBride, "The Economic and Budgetary Effects of Bonus Expensing," Tax Foundation, April 29, 2014.

 

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