The Tax Cuts and Jobs Act (TCJA), a significant piece of tax legislation, introduced a series of changes to the tax code, particularly in the realm of expensing policies. The initial draft of the TCJA, the 2016 House GOP blueprint, proposed full expensing for all capital investment. However, the final law fell short of this ideal, enacting expensing for investment in short-lived assets only temporarily and worsening the tax treatment of research and development (R&D).
The TCJA introduced 100 percent bonus depreciation for short-lived assets from September 27, 2017, until January 1, 2023. This policy allowed businesses to deduct a larger portion of certain investments in the first year, incentivizing companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. However, starting in 2023, bonus depreciation declines by 20 percentage points each year.
The TCJA also introduced R&D amortization. Before this policy took effect at the beginning of 2022, companies could fully deduct their R&D costs in the year incurred. With R&D amortization, companies must spread deductions for domestic R&D investment out over five years and deductions for R&D performed abroad over 15 years, reducing the real value of those deductions.
The decision to make expensing for equipment and machinery temporary was largely due to fiscal costs. The law’s architects were working within a specific fiscal framework, where they could not increase the deficit by more than $1.5 trillion over 10 years. By phasing full expensing out midway through the budget window, the authors reduced the deficit impact of the policy at the expense of long-run growth incentives.
The TCJA did not extend expensing to structures due to fiscal cost and concerns from the real estate industry that the tax provision would lead to overbuilding and tax-motivated investment. As a result, the TCJA largely left in place the long cost recovery periods for structures: 27.5 years for residential rental property and 39 years for commercial real estate investment.
The idea of amortizing R&D expenses over five years was introduced later in the legislative process to bring the overall cost of the bill down. However, in 2024, amortization for R&D remains in effect. Lawmakers are currently considering temporarily and retroactively providing R&D expensing for domestic R&D investment in 2022 and 2023 as well as for 2024 and 2025.
The ideal policy option for cost recovery would be full expensing for all capital investment. However, the fiscal cost of full expensing across the board—$1.7 trillion over ten years—may prove prohibitive. As we move forward, it’s crucial to continue examining these policies and their impacts on our economy. For more information, visit Tax Foundation.