Increasing Investment with Bonus Depreciation
December 17, 2014
When businesses make investments (such as purchasing equipment or buildings), they cannot deduct the full cost of those expenses in the same way that they would with other types of expenses. Instead, they are required to "depreciate" those expenses, meaning that the costs are slowly written off over several years, and sometimes decades. Depreciation ignores the fact that the value of money changes over time, which means the deductions do not add up to the full cost of the investment.
Bonus depreciation, on the other hand, is a policy that allows purchasers of equipment and software to immediately write off half the cost of their expenses. According to William McBride of the Tax Foundation, bonus depreciation increases investment. The policy is especially important for small companies that are less able to access loans, because smaller businesses tend to pay for new investments with their retained earnings. Bonus depreciation increases firms' retained earnings, so investment increases.
McBride's claim is consistent with a study from Eric Zwick and James Mahon, professors at the University of Chicago and Harvard University, respectively, who examined the impact of bonus depreciation by analyzing 100,000 businesses. According to their research:
- Bonus depreciation increased investment by 17 percent between 2001 and 2004.
- It increased investment by 29.5 percent between 2008 and 2010.
McBride argues that bonus depreciation -- which is generally passed on a temporary basis -- should be made permanent, though a recent article in the Wall Street Journal concludes that bonus depreciation did not increase AT&T or Verizon's investment levels. McBride says looking at just two companies to gauge the impact of bonus depreciation is too small of a sample size and contends that permanent, rather than temporary, bonus depreciation would better boost investment levels.
Source: William McBride, "Wall Street Journal Downplays Beneficial Effects of Bonus Depreciation," Tax Foundation, December 12, 2014; Thomas Gryta, "AT&T, Verizon Tax Breaks Fail to Produce Jobs," Wall Street Journal, December 12, 2014.
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