I was listening to CNBC, and it was mentioned that the BBB reduces the depreciation schedule to one year instead of, say, over five years.
Any thoughts on business growth implications?
DB2
Haven’t seen that one anywhere.
I assume that means for tax purposes, not financial reporting.
Might goose spending in the short term (take out a 5 year loan for a car but write the whole thing off in year 1). Take a dollar in tax savings today and pay it back with inflationary tax dollars in the future. Should work unless it changes your tax rate down the line or we hit a deflationary period.
Seems like a gimmick.
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I get that in accounting you can have a second rail, but taxes are the point of this.
It will reduce tax revenues because startups do not have the profits for the write-off in year one. Things like that will hurt tax revenues.
According to Google:
Here’s how the OBBBA affects business depreciation timing:
- Permanent 100% bonus depreciation: The OBBBA permanently reinstates 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, allowing immediate deduction of the full cost of eligible assets in the year they are placed in service. This reverses the previously scheduled phase-down of bonus depreciation.
- Expansion of Section 179 expensing: The OBBBA increases the Section 179 deduction limit to $2.5 million annually (from $1 million) and raises the phase-out threshold to $4 million (from $2.5 million) for assets placed in service after December 31, 2024. These limits will be adjusted for inflation in subsequent years. This enables businesses to expense a larger portion of qualifying asset purchases upfront.
- Restoration of R&E expensing: The OBBBA permanently restores the ability to immediately deduct domestic research and experimental (R&E) expenditures for tax years beginning after December 31, 2024, reversing the previous requirement to amortize such costs over five years. Businesses meeting certain criteria can even elect to retroactively claim this deduction for costs incurred from 2022 to 2024.
- New bonus depreciation for manufacturing facilities: The OBBBA introduces a new 100% bonus depreciation allowance for qualified production property used in manufacturing, production, or refining, provided construction begins within a specified timeframe and the property is placed in service before January 1, 2031.
- Clean energy credit changes and depreciation: The OBBBA impacts clean energy tax incentives, including accelerating the phase-out or repealing some credits. Energy property beginning construction after December 31, 2024, is removed from the five-year MACRS class designation, but these assets may still qualify for 100% bonus depreciation under certain conditions. [end quote]
These changes are designed to encourage businesses to invest in capital equipment. They accelerate depreciation deductions, potentially improving cash flow and reducing short-term tax liabilities.
The new bonus depreciation for manufacturing facilities is clearly aimed at bringing manufacturing back to the U.S. Manufacturing plants are very capital-intensive. If the cost of building the plant is immediately tax-deductible the profits from the manufacturing will be immediately sheltered. Bonus depreciation can create a net operating loss (NOL) which can also be carried forward, subject to certain limitations on the amount of NOL that can be deducted in future years (currently 80% of taxable income). This is a valuable benefit since the NOL carry-forward can be used to shelter profits in future years.
This is a great way to help kick-start manufacturing in the U.S. Of course, it will cost the government the taxes on the profits.
Wendy
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Perhaps the biggest win for businesses is the restoration of 100% bonus depreciation. Effective for assets placed in service after January 19, 2025, this change repeals the previously scheduled phase-down and allows businesses to fully expense qualifying assets in the year of purchase.
Businesses planning capital improvements, equipment upgrades, or property renovations can deduct the entire cost upfront, improving cash flow and incentivizing accelerated growth strategies. For real estate investors, this renews the full power of cost segregation studies to maximize depreciation deductions…
Also:
The bill permanently reinstates the immediate deduction of domestic research and experimental expenses through new Section 174A. Companies can now elect to deduct or amortize R&D expenses incurred after 2024. In addition, eligible small businesses (average gross receipts of $31M or less) may retroactively apply this provision back to 2022, unlocking catch-up deductions.
This is a powerful liquidity and tax planning tool for innovators, manufacturers, and technology firms, especially those with capitalized R&D from 2022–2024.
DB2
AI Overview
No, tax loss carryforwards and depreciation deductions are not the same percentage off taxes
.
- Depreciation Deduction: Depreciation is an annual deduction that reduces a business’s taxable income by accounting for the wear and tear of assets over time. The tax shield created by depreciation is the depreciation amount multiplied by the applicable tax rate. For example, if a company has $10,000 in depreciation and a 21% corporate tax rate, the depreciation tax shield is $2,100, effectively reducing their tax liability by that amount.
- Tax Loss Carryforwards (Net Operating Losses - NOLs): When a business’s expenses exceed its gross income, it can result in a Net Operating Loss (NOL). This loss can be carried forward indefinitely to offset future taxable income. However, under current U.S. federal tax law, NOL deductions are generally limited to 80% of taxable income in any given year. This means a business can’t use an NOL carryforward to reduce its taxable income to zero. It must still pay taxes on at least 20% of its income.
In essence, depreciation directly reduces taxable income, and the tax savings are a direct function of the tax rate. NOL carryforwards also reduce taxable income, but the deduction is limited to 80% of future taxable income.
Example
Imagine a company with a $100,000 net operating loss carryforward and $50,000 in current-year depreciation.
- Depreciation: Assuming a 21% tax rate, the depreciation tax shield would be $50,000 x 21% = $10,500.
- NOL Carryforward: If the company has $100,000 in taxable income (before the NOL deduction), the maximum NOL deduction would be $100,000 x 80% = $80,000. This leaves $20,000 in taxable income, which will be taxed at the applicable rate. The company saves taxes on $80,000 of income at the relevant tax rate, but not on the full $100,000 NOL.
This illustrates the difference in how these two tax benefits are applied and the limitations associated with NOL carryforwards.
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Having 2 side rental businesses, won’t really change anything for me. Other than the initial property acquisition, not buying anything else big enough (either dollar wise or quantity wise) that warrants a depreciation schedule.
Maybe my thoughts on running a business is too simple. If its a good idea to start and/or expand, don’t see where depreciation schedules make much a difference (I’m sure it does at some level, maybe just not the small level I’m at). I just find it hilarious that because of property depreciation, I have been running at a loss for 10-15 years as far as the IRS is concerned. Obviously I haven’t been loosing money, it is accounting handwaving (in my mind). Plus (again for me), depreciation makes taxes more complicated if I ever decide to sell my business due to depreciation recapture taxes.
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The NOL Carryforward has an advantage I did not realize. It makes 80% of the depreciation deductible.
You are forgetting this part that Wendy put in.
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The linked article above indicates a cash flow benefit. If your growing business needs five new trucks/whatevers then that expense has to be borne upfront yet can only be written off over a number of years. Now it can be expensed in the same year.
DB2
Certainly is interesting.
I was thinking yesterday of additional incentives such as 120% deductible for what we want.
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Even better, let’s say your business needs 1 million hopper chips from NVDA. This will created a boom for the crypto and data centers. They will probably never have to pay taxes.
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There is a problem here.
Choice
Take a risk with taxable income versus deducting a loss off of your taxes.
Meaning if you have profits you do not get the loss carry forward.
In other words managers with losses get the benefit. Mangers with profits are not incentivized as much.
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I’m assuming you mean in the US. I shook my Magic 8 Ball and it came back - “Don’t count on it”. It seems like a good plan to incentivize more capital expenditures through tax policy. I think it could work, if economic conditions were stable. Things seem about as unstable as a ketamine crazed tech bro right now. Building out new capacity takes money and TIME. Who knows what the tariff policy will be when new production comes on line? I certainly don’t.
There’s a good chance that some production will come back to the US. This would be extremely positive for things that impact national security. We’ll need more than high tariffs and tax incentives to pull this off.
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If I can write off 100 percent of anything I buy on my taxes I would see that as a huge benefit. I can buy anything for my business and the government is paying for it.
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Honestly this not where the problem lies for me. This is good for the economy.
I am concerned that raising corporate taxes would be far better for the economy but not happening.
This rash of nonsense from Google AI is tilted.
AI Overview
Impact on GDP: restoration of 100% bonus depreciation vs. higher corporate tax rate
This question is about comparing the impact of two different tax policy changes on Gross Domestic Product (GDP): restoring 100% bonus depreciation and increasing the corporate tax rate.
- Restoring 100% bonus depreciation
- Mechanism: Bonus depreciation allows businesses to deduct a significant portion of the cost of eligible assets (like machinery and equipment) in the year they are placed in service, instead of depreciating them over time.
- Intended Effect: This accelerated depreciation aims to improve businesses’ cash flow and provide an incentive for them to invest more in new equipment and technology.
- Potential Benefits (according to proponents):
- Boosts business investment and therefore increases GDP.
- Enhances productivity and economic growth.
- May create jobs and increase wages.
- Potential Concerns:
- The Congressional Research Service (CRS) suggests that the effectiveness of bonus depreciation as a stimulus may be limited, according to the Center on Budget and Policy Priorities.
- Some argue that bonus depreciation might subsidize investments that would have occurred anyway, limiting its overall impact on economic growth.
- Making it permanent might reduce its effectiveness as a stimulus during future economic downturns, as firms might not feel the need to accelerate purchases.
- It is a costly policy, estimated to reduce federal revenue significantly.
- Increasing the corporate tax rate
- Mechanism: A higher corporate tax rate increases the amount of taxes businesses pay on their profits.
- Potential Impact on Investment and GDP (according to some):
- Higher corporate taxes can reduce capital investment by making it more expensive.
- This reduction in capital investment could lead to lower long-term productivity and slower economic growth, as measured by GDP.
- Counterarguments:
- The literature on the impact of corporate taxes on economic growth is ambiguous, with some studies suggesting that corporate tax cuts have a limited or even insignificant impact on growth, according to ScienceDirect.com.
- Some argue that the negative effects of higher corporate taxes on growth may be offset if the additional revenue is used to increase productive public expenditures or cut other taxes.
- The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the corporate tax rate, and the impact of this change on the economy has been debated.
Conclusion
Economists and policy analysts hold varying views on the relative impact of restoring 100% bonus depreciation versus increasing the corporate tax rate on GDP.
- Supporters of 100% bonus depreciation believe it incentivizes business investment, leading to increased productivity and economic growth.
- Critics of 100% bonus depreciation suggest its effectiveness as a stimulus might be limited and that it is a costly policy.
- Those concerned about higher corporate taxes argue they can deter investment and negatively affect economic growth.
- Others contend that the impact of corporate taxes on growth is not definitively negative and may depend on how the tax revenue is utilized.
Ultimately, the choice between these two policies involves weighing the potential benefits and costs, considering different economic theories, and accounting for the potential impact on various sectors and stakeholders.
If you buy a piece of capital equipment you used to have to use it for (at least) the full depreciation period to achieve the full writeoff benefit. Now you can (in effect) expense the whole thing even if you go out of business a year later. That hammers tax receipts over the short term and also long term for those who don’t use it to term.
Presumably this is also for landlords who buy/build or any other commercial business really. Quick goose to profits, possible (and probable) loss for the tax man.
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Could you explain that? The total depreciation is the same, only the time frame has changed. Shouldn’t tax receipts end up the same overall?
DB2
…so work at this the other way around, because the low corporate tax means only 21% of the expense is saved on the company’s taxes. The decision to reinvest is the same and therefor limited by how low the corporate tax rate is.
- Depreciation is a deduction, not a credit: Depreciation, including 100% bonus depreciation (when applicable), functions as a deduction. This means it reduces a company’s taxable income.
- The tax rate applies to taxable income: The corporate marginal tax rate (currently 21% federally for C corporations as of 2025) is then applied to this reduced taxable income to determine the actual tax liability.
Example
Imagine a company with $1,000,000 in revenue and $500,000 in other expenses, resulting in $500,000 of profit before depreciation.
If the company buys a $200,000 asset and can claim 100% bonus depreciation on it:
- Taxable Income without Depreciation: $1,000,000 (Revenue) - $500,000 (Expenses) = $500,000.
- Taxable Income with 100% Bonus Depreciation: $500,000 (Profit before depreciation) - $200,000 (100% bonus depreciation) = $300,000.
- Tax Liability: $300,000 (Taxable Income) * 21% (Corporate Tax Rate) = $63,000.
I did explain it:
Now you can (in effect) expense the whole thing even if you go out of business a year later. That hammers tax receipts over the short term and also long term for those who don’t use it to term.
Half of all businesses fail within the first five years. Those who take the full depreciation the first year and then go under will have taken a 100% deduction instead of the partial year-by-year deduction they would have otherwise. That’s “less tax receipt” isn’t it?
The business might have had tax obligations at some point but can now wipe them out (by using the “phantom” depreciation) but then go under later.
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