Raw: [The OBBBA significantly boosted economic prospects by improving the treatment of investment. By making key expensing provisions permanent, the OBBBA created better conditions for long-term growth. However, there’s still work to be done, and the OBBBA provided a blueprint for policymakers to follow.]
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Home • Blog • The OBBBA Improved the Treatment of Investment—but There’s Still Work to Do
The OBBBA Improved the Treatment of Investment—but There’s Still Work to DoApril 7, 20264 min readBy: Tyler ParksKey Points
The One Big Beautiful Bill Act (OBBBA) enhanced businesses’ ability to fully and immediately deduct—or expense—certain investments.
Expensing is a powerful, proven tool to incentivize investment in the US, and studies find that it helps businesses grow and hire more workers.
Although the OBBBA improved cost recovery for some structures, extending expensing to all structures would be a significant pro-growth tax reform.
The One Big Beautiful Bill Act (OBBBA) made it more attractive for companies to invest in the US. It permanently extended key expensing provisions for equipment, machinery, and research and development (R&D) and applied expensing to manufacturing property, the broadest federal effort yet to improve cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions..
Of all the provisions in the OBBBA, expensing provides the most economic growth for the least cost. While it will take many years for the policy to take full effect, the legislation is providing a substantial boost to economic growth this year, according to analysis by the Tax Foundation and the Congressional Budget Office. In the long term, the OBBBA set the stage for growth through permanent incentives to invest in the US.
Why Does Expensing Matter?
Expensing allows businesses to immediately write off the full cost of an investment. In contrast, the standard treatment of depreciating and waiting to deduct investments over several years means business investment is penalized due to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin and the time value of money.
Consider the treatment of a business investment of $1,000 in a piece of equipment, which, according to standard taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules, must be depreciated over six years. Assuming 3 percent inflation and a 3 percent discount rate, the deduction loses about 18 percent of its real value by the time the business fully depreciates the asset.
For a corporation subject to a 21 percent tax rate, this raises the after-tax cost of the investment by 3.8 percent.
What Are the Major Changes to Expensing in the OBBBA?
The OBBBA made expensing for equipment (bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco) and domestic R&D permanent. Further, the legislation expanded small business expensing, known as Section 179, on a permanent basis and added a new provision that allows expensing for manufacturing structures, the new Section 168(n), on a temporary basis for new construction beginning before 2029.
Table 1. Description of the Major Expensing Provisions in the OBBBA
ProvisionEligible AssetsOBBBA Changes
Expensing of Certain Business Assets (Section 179)Some structures and tangible personal property, including HVAC, telecommunications equipment, and furniture. Allowed to deduct up to $2.5 million of eligible assets then phases out by the amount over $4 million.Increased the amount eligible from $1 million to $2.5 million and increased the phaseout to $4 million.
Bonus Depreciation (Section 168[k])Property with asset lives of 20 years or less (equipment and machinery), computer software, water utility property, and film, TV, and theatrical productions.Permanently extends 100% bonus rate for property placed in service after January 19, 2025.
Expensing of Research and Development Expenditures (Section 174)Domestic R&D expenses that are not claimed under the R&D tax credit. Includes software development.Domestic R&D expensed, reversing TCJA changes. Foreign R&D must be amortized over 15 years. Retroactive expensing for R&D expenses incurred after Dec. 31, 2021, for certain small businesses.
Temporary Expensing of Certain Manufacturing Property (Section 168[n])Nonresidential property involved in manufacturing, production, or refining of “qualified products.”Eligible property is expensed. Must have started construction after Jan. 19, 2025, and before Jan. 1, 2029. Property must be placed in service by Jan. 1, 2031.
Source: Tax Foundation
The changes solidify and improve cost recovery provisions from the Tax Cuts and Jobs Act (TCJA), which had temporarily extended bonus depreciation and required amortization of R&D beginning in 2022 (the OBBBA allows expensing for domestic R&D only, so amortization is still required for foreign-cited R&D).
Although Section 179 applies to more asset classes than bonus depreciation, its deduction limits confine its benefits to smaller businesses and reduce its overall economic significance.
While the manufacturing provision in the OBBBA provides a temporary boost to growth, it does not contribute to long-term growth because it is temporary.
Table 2. Economic and Revenue Effects of OBBBA’s Changes to Expensing Provisions
ProvisionLong-Run GDP10-Year Conventional Revenue, in Billions
Increased Allowance and Phaseout for Certain Business Assets (Section 179)Not Modeled-$24.80
Permanent Extension of 100 Percent Bonus Depreciation0.60%-$473.10
Permanent Domestic R&D Expensing and Retroactive Extension or Acceleration of Remaining Deductions0.10%-$178.00
Temporary Expensing of Certain Manufacturing Property0.00%-$27.10
Total0.7%-$703.0
Source: Tax Foundation General Equilibrium Model, February 2026; Joint Committee on Taxation, “Estimated Revenue Effects Relative To The Present Law Baseline Of The Tax Provisions In ‘Title VII – Finance’ Of The Substitute Legislation As Passed By The Senate To Provide For Reconciliation Of The Fiscal Year 2025 Budget, JCX-35-25,” Jul. 1, 2025, https://www.jct.gov/publications/2025/jcx-35-25/.
What’s the Evidence That Expensing Works?
By removing the tax penalty caused by depreciation, businesses make investments they otherwise would not have. When businesses invest more, workers benefit.
Most empirical evidence on the benefits of expensing is related to bonus depreciation. Multiple studies find that bonus depreciation boosts capital investment and increases employment but has a mixed impact on workers’ earnings, with one study finding the policy especially beneficial for “young workers, workers with fewer years of education, female workers, Black workers, and Hispanic workers.”
R&D spending is a key driver of long-term growth and innovation. Many small and medium-sized businesses take advantage of R&D expensing because it is easier for them to claim than the R&D tax credit. Research from the Stanford Business School estimates that R&D amortization reduced R&D investment by $12.1 billion and increased effective tax rates by 62 percent. It follows that expensing would reverse these changes.
While Section 179 and Section 168(n) as currently implemented have relatively minor impacts on the economy in the long run, they are good first steps to improving the tax treatment of investment. Most structures are subject to the long depreciation schedules of 27.5 years for residential buildings and 39 years for nonresidential buildings. Improving the treatment of those investments would remove a large tax penalty.
According to our model, expensing, or similar treatment, of all structures would boost growth by 1.3 percent. A Tax Foundation study from 2020 finds that applying a policy similar to expensing on residential structures could lead to 2.33 million new homes over the long run. Evidence from the 1981 tax reform suggests that improving cost recovery encouraged building and that the subsequent lengthening of depreciation schedules depressed construction.
The OBBBA significantly boosted economic prospects by improving the treatment of investment. By making key expensing provisions permanent, the OBBBA created better conditions for long-term growth. However, there’s still work to be done, and the OBBBA provided a blueprint for policymakers to follow.
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About the Author
Tyler ParksDirector of Government Relations
Tyler Parks is the Director of Government Relations, leading the Tax Foundation’s efforts to communicate sound tax policy to the federal government.
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TagsTags:100 Percent Bonus Depreciation (Full Expensing)One Big Beautiful Bill Act (OBBBA)Research and Development (R&D)
LocationsLocations:United States
Authors
Tyler ParksDirector of Government Relations
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