PRESENT LAW AND LEGISLATIVE BACKGROUND RELATING 

TO DEPRECIATION AND SECTION 179 EXPENSING 

Scheduled for a Public Hearing 

Before the 

SUBCOMMITTEE ON LONG-TERM GROWTH 

AND DEBT REDUCTION 

of the 

SENATE COMMITTEE ON FINANCE 

on July 21, 2005 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 20, 2005 

JCX-54-05 
ii

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. PRESENT LAW AND BACKGROUND RELATING TO DEPRECIATION AND 

EXPENSING OF TANGIBLE PROPERTY USED IN A TRADE OR BUSINESS ........ 2 

A. Depreciation.................................................................................................................... 2 

B. Recent Statutory Developments for Specific Types of Property.................................. 10 

C. Expensing for Small Businesses (section 179 of the Code) ......................................... 12 

II. ECONOMIC DATA ......................................................................................................... 14 

A. Taxonomy of Aggregate Investment in the United States............................................ 14 

B. Investment Subject to Tax Expensing or Depreciation................................................. 17 
1 

INTRODUCTION 

The Subcommittee on Long-Term Growth and Debt Reduction of the Senate Committee 

on Finance has scheduled a public hearing on Thursday, July 21, 2005, on depreciation and 

section 179 expensing. 

This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a 

description of present law and legislative background relating to depreciation and section 179 

expensing of tangible property used in a trade or business. This pamphlet does not address other 

cost-recovery concepts, such as amortization of intangible assets. 

 1

 This document may be cited as follows: Joint Committee on Taxation, “Present Law and 

Legislative Background Relating to Depreciation and Section 179 Expensing” (JCX-54-05), July 20, 

2005. 
2 

I. PRESENT LAW AND BACKGROUND RELATING TO DEPRECIATION 

AND EXPENSING OF TANGIBLE PROPERTY USED 

IN A TRADE OR BUSINESS 

A. Depreciation 

In general

A taxpayer is allowed to recover, through annual depreciation deductions, the cost of 

certain property used in a trade or business or for the production of income. The amount of the 

depreciation deduction allowed with respect to tangible property for a taxable year is determined 

under the modified accelerated cost recovery system (“MACRS”). Under MACRS, different 

types of property are generally assigned applicable recovery periods and depreciation methods. 

The recovery periods applicable to most tangible personal property (generally tangible property 

other than residential rental property and nonresidential real property) range from three to 25 

years. The depreciation methods generally applicable to tangible personal property are the 200-

percent and 150-percent declining balance methods, switching to the straight-line method for the 

taxable year in which the depreciation deduction would be maximized.2

 In general, the recovery 

periods applicable to real property are 39 years for non-residential real property and 27.5 years 

for residential rental property. The depreciation method for real property is the straight-line 

method. 

Under MACRS, the full basis of depreciable property is recovered by the taxpayer over 

the applicable recovery period; there is no need to estimate salvage value. Furthermore, under 

MACRS, the applicable recovery period need not (and typically does not) correspond to the 

actual economic life of the asset subject to depreciation. In general, however, MACRS generally 

provides for longer recovery periods for longer lived assets. 

Legislative background

The current MACRS rules modified the “accelerated cost recovery system” (“ACRS”) 

rules enacted in 1981.3

 In 1985, the staff of the Joint Committee on Taxation described the pre1981 system: 

Class lives are generally based on guideline lives established for the Asset 

Depreciation Range (“ADR”) system of depreciation that was adopted in 1971. 

Under the ADR system, a present class life was provided for all assets used in the 

same activities, other than certain assets with common characteristics (e.g., 

automobiles). Assets were grouped into more than 100 classes and a guideline life 

 2

 For certain property, including tangible property used predominantly outside the United States, 

tax-exempt use property, tax-exempt bond-financed property, and certain other property, the MACRS 

“alternative depreciation system” of section 168(g) applies, generally increasing recovery periods and 

requiring straight-line depreciation as described below. 

3

 The “Economic Recovery Tax Act of 1981,” Pub. L. No. 97-34, sec. 202 (1981). 
3 

was determined by the former Office of Industrial Economics in the Treasury 

Department. The guideline lives established under the ADR system were about 30 to 

40 percent shorter than the service lives found in Bulletin F, a publication concerning 

useful lives issued in 1942 by the Internal Revenue Service.4

In 1981, the prior-law ADR system was replaced by a new system, ACRS, which 

permitted “recovery of capital costs for most tangible depreciable property using accelerated 

methods of cost recovery over predetermined recovery periods generally unrelated to, but shorter 

than, [prior] law useful lives.”5

 The Senate Finance Committee Report with respect to the 

provision explained the rationale for the change: “[t]he committee believes that the present rules 

for determining depreciation allowances . . . need to be replaced because they do not provide the 

investment stimulus that is essential for economic expansion. The real value of depreciation 

deductions allowed under present rules has declined for several years due to successively higher 

rates of inflation. . . . The committee therefore believes that a new capital cost recovery system 

is required which provides for the more rapid acceleration of cost recovery deductions . . . ”6

These rules were tightened somewhat in 1982,7

 and modified more substantially in 1986,8

when the MACRS rules were adopted. Primarily, MACRS further accelerated the rate of 

recovery of depreciation deductions from the 150-percent declining balance method to the 200- 

percent declining balance method for those tangible assets with the shortest class lives. In 

addition, certain assets were reclassified and the number of asset classes was increased. 

Placed-in-service conventions

Depreciation of an asset begins when the asset is deemed to be placed in service under 

the applicable convention. Under MACRS, nonresidential real property, residential rental 

property and any railroad grading or tunnel bore are generally subject to the mid-month 

convention, which treats all property placed in service during any month (or disposed of during 

any month) as placed in service (or disposed of) on the mid-point of such month. All other 

property is generally subject to the half-year convention, which treats all property placed in 

service during any taxable year (or disposed of during any taxable year) as placed in service (or 

disposed of) during the mid-point of such taxable year. However, if substantial property is 

placed in service during the last three months of a taxable year, a special rule requires use of the 

mid-quarter convention, designed to prevent the recognition of disproportionately large amounts 

of first-year depreciation under the half-year convention. 

 4

 Joint Committee on Taxation, “Tax Reform Proposals: Taxation of Capital Income” (JCS-35-

85), August 8, 1985, p 48. 

5

 S. Rep 97-144, 48 (1981). 

6

 Id. at 47. 

7

 The “Tax Equity and Fiscal Responsibility Act of 1982,” Pub. L. No. 97-248, sec. 206 (1982). 

8

 The “Tax Reform Act of 1986,” Pub. L. No. 99-514, sec. 201 (1986). 
4 

Recovery periods

The applicable recovery period for an asset is determined in part by statute and in part by 

historic Treasury guidance. In 1987, and again in 1988, the Treasury Department published 

“class lives” for various categories of depreciable property. The “class life” of an asset is then 

used to determine the “type of property” of the asset, which in turn dictates the applicable 

recovery period for the asset. 

In addition, the MACRS provisions of the Internal Revenue Code explicitly categorize 

certain assets by type of property, effectively superseding any administrative guidance with 

regard to such property. Table 1, summarizes the various types of property and applicable 

recovery periods under MACRS:
Table 1.

−Selected Property Classes and Recovery Periods under MACRS 

Type of Property General Rule-Class Life of: Specific Classifications by Statute Applica

3-year property 4 years of less Certain race horses and most other horses; qualified rent-to-own property. 5-year property More than 4 but less than 10 years 

Automobiles and light general purpose trucks; semi-conductor manufacturing equipment; computer-based telephone central office switching equipment; qualified technological equipment;1 certain research property; certain 

solar, wind or geothermal energy property. 

7-year property 

10 or more but less than 16 years; also, property (other than real property) without a class life 

Railroad track; certain motorsports entertainment complexes; certain Alaska natural gas pipeline. 

10-year property 16 or more but less than 20 years Any single purpose agricultural or horticultural structure; any tree or vine bearing fruit or nuts. 15-year property 20 or more but less than 25 

years 

Any municipal wastewater treatment plant; certain telephone distribution equipment; certain retail motor fuels outlet property; qualified leasehold improvements placed in service before January 1, 2006; qualified restaurant property placed in service before January 1, 2006; initial clearing and grading land improvements with respect to gas utility property. 

20-year property 25 or more years 

Initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant 

Water utility property Residential rental property Nonresidential real property Any railroad grading or tunnel bore 1 The term “qualified technological equipment” is defined as computers and related peripheral equipment, high technology telephone s

on a customer’s premises, and high technology medical equipment. Sec. 168(i)(2).

5
6 

Authority to set or modify class lives

When the MACRS system was enacted in 1986, the Congress directed the Secretary of 

the Treasury to establish an office to monitor and analyze actual experience with respect to 

depreciable assets and authorized the Secretary to prescribe or modify class lives for depreciable 

assets, provided that the new class life reasonably reflected the anticipated useful life and the 

anticipated decline in value over time of the property to the industry or other group. 

Exercising the authority granted by the Congress, the Secretary issued Revenue 

Procedure 87-56,9 laying out the framework of recovery periods for enumerated classes of assets. 

The Secretary clarified and modified the list of asset classes in Revenue Procedure 88-22.10

In November 1988, the Congress revoked the Secretary’s authority to modify the class 

lives of depreciable property as part of the Technical and Miscellaneous Revenue Act of 1988.11 

Revenue Procedure 87-56, as modified, remains in effect except to the extent that the Congress 

has, since 1988, statutorily modified the recovery period for certain depreciable assets.12

Additional first-year depreciation deduction (“bonus depreciation”)

For property generally placed in service prior to January 1, 2005, Congress provided an 

additional first-year depreciation deduction. The Job Creation and Worker Assistance Act of 

200213 (“JCWAA”) allowed an additional first-year depreciation deduction equal to 30 percent 

of the adjusted basis of qualified property for property placed in service on or after September 

11, 2001, and before January 1, 2005. The Jobs and Growth Tax Relief Reconciliation Act of 

200314 (“JGTRRA”) provided an additional first-year depreciation deduction equal to 50 percent 

of the adjusted basis of qualified property for property acquired and placed in service by the 

taxpayer after May 5, 2003 and before January 1, 2005.15

The legislative history for JGTRRA set forth the rationale for extending and increasing 

the benefit as follows: 

 9

 1987-2 CB 674. 

10 1988-1 CB 785. 

11 Pub. L. No. 100-647, sec. 6253 (1988). 

12 See discussion below of recent statutory developments for specific types of property. 

13 Pub. L. No. 107-147, sec. 101 (2002). 

14 Pub. L. No. 108-27, sec. 201 (2003). 

15 The additional first-year depreciation deductions were subject to the general rules regarding 

whether an item is deductible under section 162 or subject to capitalization under section 263 or section 

263A. 
7 

The Committee believes that increasing and extending the additional first-year 

depreciation will accelerate purchases of equipment, promote capital investment, 

modernization, and growth, and will help to spur an economic recovery. As 

businesses accelerate their purchases of equipment current employment will increase 

to produce that equipment. Current business expansion also will increase employment 

opportunities in the years ahead.16

The additional first-year depreciation deduction is allowed for both regular tax and 

alternative minimum tax purposes for the taxable year in which the property was placed in 

service.17 The basis of the property and the depreciation allowances in the year of purchase and 

later years are appropriately adjusted to reflect the additional first-year depreciation deduction. 

A taxpayer is allowed to elect out of the additional first-year depreciation for any class of 

property for any taxable year. 

Section 168(k) provides detailed rules for determining whether property is eligible for the 

additional first-year depreciation, including time periods within which the property must have 

been acquired as well as placed in service (with exceptions for property acquired or constructed 

pursuant to a binding written contract entered into either before or during the relevant time 

periods), and other special rules for self-constructed and leased property. 

Depreciation under the alternative minimum tax regime

In determining the amount of alternative minimum taxable income for any taxable year, 

taxpayers are generally required to calculate depreciation for certain assets under modified rules. 

Specifically, assets to which the 200-percent declining balance method is applicable under 

MACRS are depreciated using the 150-percent declining balance method for purposes of 

computing alternative minimum taxable income.18

In addition, for property placed in service on or before December 31, 1998, depreciation 

for alternative minimum tax purposes is calculated using the longer recovery periods of the 

alternative depreciation system as described below.19

Alternative depreciation system

When MACRS was enacted, Congress also created the alternative depreciation system 

(“ADS”), which is required to be used for property used predominantly outside the United States 

 16 H.R. Rep. No. 108-94, at 23. 

17 However, the additional first-year depreciation deduction was not allowed for purposes of 

computing earnings and profits. 

18 Sec. 56(a)(1)(A)(ii). 

19 Sec. 56(a)(1)(A)(i). 
8 

and certain tax-exempt use property.20 Under ADS, all property is depreciated using the straightline method, over recovery periods which are generally longer than those used under MACRS. 

Bonus depreciation is not available for property required to be depreciated using the alternative 

depreciation system. 

Recovery period for tax-exempt use property subject to lease

Property that is leased to a tax-exempt person must be depreciated on a straight-line basis 

over a recovery period equal to the longer of the property’s class life or 125 percent of the lease 

term.21 Such property generally includes property that is leased (other than under a short-term 

lease) to a tax-exempt entity (including a foreign entity).22 This provision serves to reduce the 

tax benefits available to lessors of property leased to or otherwise used by tax-exempt entities. 

Special depreciation rules for liberty zone property

Section 1400L provides certain tax benefits for the area of New York City damaged in 

terrorist attacks on September 11, 2001 (an area defined in the provision and named the New 

York Liberty Zone). Among these benefits, section 1400L provides an additional first-year 

depreciation deduction equal to 30 percent of the adjusted basis of qualified New York Liberty 

Zone (“Liberty Zone”) property.23 For property which is already subject to the bonus 

depreciation rules, no further benefit is available under this provision. However, Liberty Zone 

property includes property placed in service on or before December 31, 2006 (December 31, 

2009, in the case of nonresidential real property and residential rental property), thus allowing 

taxpayers the continued benefit of the additional 30 percent first-year depreciation deduction for 

Liberty Zone property, even after the expiration of the general bonus depreciation regime.24 

In addition, section 1400L also provides that qualified New York Liberty Zone leasehold 

improvement property has an elective 5-year recovery period (rather than the 15-year recovery 

 20 Sec. 168(g). 

21 Sec. 168(g)(3)(A). In the case of computer software and intangible assets, this rule is applied 

by substituting useful life and amortization period, respectively, for class life. 

22 Sec. 168(h)(1). However, tax-exempt use property generally does not include qualified 

technological equipment that meets the exception for leases of high technology equipment to tax-exempt 

entities with lease terms of five years or less. Sec. 168(h)(3). 

23 Rules similar to the general bonus depreciation rules apply with regard to leased property, as 

well as with regard to self constructed property and property subject to a binding written contract in effect 

for the acquisition of the property at any time before September 11, 2001. Likewise, as with the general 

bonus depreciation regime, a taxpayer is allowed to elect out of the additional first-year depreciation on 

qualified Liberty Zone property for any class of property for any taxable year. 

24 Non-residential real property or residential rental property is Liberty Zone property only to the 

extent it rehabilitates real property damaged, or replaces real property destroyed or condemned, as a result 

of the September 11, 2001, terrorist attack. Sec. 1400L(b)(2)(B). 
9 

period for qualified leasehold improvement property placed in service before January 1, 2006, or 

the 39-year recovery period for qualified leasehold improvement property placed in service after 

December 31, 2005). 

Special depreciation rules for luxury automobiles

Section 280F(a) limits the annual cost recovery deduction with respect to certain 

passenger automobiles otherwise depreciable under the general rules described above. This 

limitation is commonly referred to as the “luxury automobile depreciation limitation.” For 

passenger automobiles placed in service in 2004, and for which the additional first-year 

depreciation deduction under section 168(k) is not claimed, the maximum amount of allowable 

depreciation is $2,960 for the year in which the vehicle is placed in service, $4,800 for the 

second year, $2,850 for the third year, and $1,675 for the fourth and later years. This limitation 

applies to the aggregate deduction provided under present law for depreciation and section 179 

expensing. 

In general, the MACRS depreciation deductions for a vehicle placed in service in 2005 

are less than the luxury automobile depreciation limitations if the vehicle costs less than $14,540. 

Thus, the limitations reduce the taxpayer’s cost recovery deduction for such a vehicle only if the 

taxpayer is eligible for section 179 expensing of the cost of the vehicle. Whether a taxpayer 

purchasing a car for more than $14,540 is limited under present law depends upon the taxpayer’s 

percentage of business use of the vehicle. In addition, the American Jobs Creation Act of 200425

(“AJCA”) limits the deduction under section 179 for certain sport utility vehicles not subject to 

section 280F to $25,000. 

 25 Pub. L. No. 108-357, sec. 201 (2004). 
10 

B. Recent Statutory Developments for Specific Types of Property 

A number of changes were made in the 108th Congress to the statutory provisions 

governing recovery periods. 

Recovery period for depreciation of certain leasehold improvements

AJCA provides a statutory 15-year recovery period for qualified leasehold improvement 

property placed in service before January 1, 2006. AJCA requires that qualified leasehold 

improvement property be recovered using the straight-line method. Qualified leasehold 

improvement property is any improvement to an interior portion of a building that is 

nonresidential real property, provided certain requirements are met. 26 The improvement must be 

made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that 

portion of the building to be occupied exclusively by the lessee (or sublessee).27 The 

improvement must be placed in service more than three years after the date the building was first 

placed in service. Qualified leasehold improvement property does not include any improvement 

for which the expenditure is attributable to the enlargement of the building, any elevator or 

escalator, any structural component benefiting a common area, or the internal structural 

framework of the building. 

Recovery period for depreciation of certain restaurant improvements

AJCA provides a statutory 15-year recovery period for qualified restaurant property 

placed in service before January 1, 2006.28 For purposes of the provision, qualified restaurant 

property means any improvement to a building if such improvement is placed in service more 

than three years after the date such building was first placed in service and more than 50 percent 

of the building’s square footage is devoted to the preparation of, and seating for, on-premises 

consumption of prepared meals.29 The Act requires that qualified restaurant property be 

recovered using the straight-line method. 

 26 Absent this provision, such improvements would generally have the same recovery period as 

the underlying nonresidential real property, i.e., 39 years, regardless of the term of the lease. 

27 If a lessor makes an improvement that qualifies as qualified leasehold improvement property, 

such improvement does not qualify as qualified leasehold improvement property to any subsequent owner 

of such improvement. An exception to the rule applies in the case of death and certain transfers of 

property that qualify for non-recognition treatment. 

28 Qualified restaurant property becomes eligible for the additional first-year depreciation 

deduction under sec. 168(k) by virtue of the assigned 15-year recovery period. 

29 As with qualified leasehold improvement property, absent this provision, such improvements 

would generally have the same recovery period as the underlying nonresidential real property, i.e., 39 

years. 
11 

Recovery period for permanent motorsports racetrack complexes

AJCA provides a statutory 7-year recovery period for permanent motorsports racetrack 

complexes. For this purpose, motorsports racetrack complexes include land improvements and 

support facilities, but do not include transportation equipment, warehouses, administrative 

buildings, hotels, or motels. The provision is effective for property placed in service after 

October 22, 2004, and before January 1, 2008. 

Recovery period for Alaska natural gas pipeline

AJCA establishes a statutory seven year recovery period and a class life of 22 years for 

any Alaska natural gas pipeline. The term “Alaska natural gas pipeline” is defined as any natural 

gas pipeline system (including the pipe, trunk lines, related equipment, and appurtenances used 

to carry natural gas, but not any gas processing plant) located in the State of Alaska that has a 

capacity of more than 500 billion Btu of natural gas per day and is placed in service after 

December 31, 2013. A taxpayer who places an otherwise qualifying system in service before 

January 1, 2014 may elect to treat the system as placed in service on January 1, 2014, thus 

qualifying for the seven-year recovery period. Absent such an election, the system is subject to 

the prior law recovery period of 15 years. 
12 

C. Expensing for Small Businesses 

(section 179 of the Code) 

In general

In lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment 

may elect to deduct (or “expense”) such costs. Present law provides that the maximum amount a 

taxpayer may expense, for taxable years beginning in 2003 through 2007, is $100,000 of the cost 

of qualifying property placed in service for the taxable year.30 In general, qualifying property is 

defined as depreciable tangible personal property that is purchased for use in the active conduct 

of a trade or business. Off-the-shelf computer software placed in service in taxable years 

beginning before 2008 is treated as qualifying property. The $100,000 amount is reduced (but 

not below zero) by the amount by which the cost of qualifying property placed in service during 

the taxable year exceeds $400,000. The $100,000 and $400,000 amounts are indexed for 

inflation.31 

The amount eligible to be expensed for a taxable year may not exceed the taxable income 

for a taxable year that is derived from the active conduct of a trade or business (determined 

without regard to this provision). Any amount that is not allowed as a deduction because of the 

taxable income limitation may be carried forward to succeeding taxable years (subject to similar 

limitations). No general business credit under section 38 is allowed with respect to any amount 

for which a deduction is allowed under section 179. An expensing election is made under rules 

prescribed by the Secretary.32

Legislative background

The rules of section 179 were originally enacted in 1958.33 The 1958 legislation 

provided that a taxpayer could elect to deduct, as additional first-year depreciation, 20 percent of 

 30 Additional section 179 incentives are provided with respect to a qualified property used by a 

business in the New York Liberty Zone (sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal 

community (sec. 1400J). 

31 For taxable years beginning in 2008 and thereafter, a taxpayer with a sufficiently small amount 

of annual investment may elect to deduct up to $25,000 of the cost of qualifying property placed in 

service for the taxable year. The $25,000 amount is reduced (but not below zero) by the amount by which 

the cost of qualifying property placed in service during the taxable year exceeds $200,000. 

32 Sec. 179(c)(1). Under Treas. Reg. sec. 179-5, applicable to property placed in service in 

taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election 

under section 179 without the consent of the Commissioner on an amended Federal tax return for that 

taxable year. This amended return must be filed within the time prescribed by law for filing an amended 

return for the taxable year. T.D. 9209, July 12, 2005. For taxable years beginning in 2008 and thereafter, 

an expensing election may be revoked only with consent of the Commissioner. Sec. 179(c)(2). 

33 “Small Business Tax Revision Act of 1958” [title II of H.R. 8381, the “Technical Amendments 

Act of 1958”], Pub. L. No. 85-866. sec. 204 (1958). 
13 

the cost of certain depreciable property. The cost of property eligible for this treatment was 

limited to $10,000, and consequently, the deduction was limited to $2,000 for the taxable year. 

Section 179 property was defined as depreciable property with a useful life of six years or more 

that was acquired by purchase after 1957 for use in a trade or business or for holding for the 

production of income. 

In 1981, when the ACRS depreciation rules were adopted (generally providing 

accelerated methods and shorter recovery periods for depreciation), the section 179 rules were 

also revised to provide expensing of a greater amount.34 The 1981 legislation provided that, for 

taxable years beginning in 1982 and 1983, a taxpayer could elect to deduct up to $5,000 of the 

cost of qualifying property placed in service in the taxable year. The dollar limitation was 

increased to $7,500 for taxable years beginning in 1984 and 1985, and increased to $10,000 for 

taxable years beginning in 1986 and thereafter.35 Qualifying property was defined as property 

acquired by purchase for use in a trade or business (not including property held merely for the 

production of income). The provision was subsequently modified to provide that the dollar 

limitation on the deductible amount is reduced (but not below zero) by the amount by which the 

cost of section 179 property placed in service during the taxable year exceeds a dollar threshold 

(currently $400,000).36

The dollar limitation was again increased in 1993 to $17,500 for taxable years beginning 

after 1992.37 In 1996, the expensing provisions were again amended to provide for the dollar 

limitation to increase over a period of several years, ultimately reaching $25,000 for taxable 

years beginning in 2003 or thereafter.38 In 2003, JGTRRA increased the relevant dollar amounts 

to their present-law limits, but only for tax years beginning after 2002 and before 2006 (sec. 

202); AJCA extended these increased amounts through taxable years beginning before 2008 (sec. 

201).

 34 The “Economic Recovery Tax Act of 1981,” Pub. L. No. 97-34, sec. 202 (1981). 

35 Subsequent legislation altered the years for which these amounts took effect. The $10,000 

amount was to become effective for taxable years beginning in 1990 and thereafter, under section 13 of 

the “Tax Reform Act of 1984,” Pub. L. No. 98-369 (1984), but was made effective for taxable years 

beginning after 1986, under section 202 of the “Tax Reform Act of 1986,” Pub. L. No. 99-514 (1986). 

36 See section 202 of the “Tax Reform Act of 1986,” Pub. L. No. 99-514 (1986). 

37 The “Omnibus Budget and Reconciliation Act of 1993,” Pub. L. No. 103-66, sec. 13116(a) 

(1993). 

38 The “Small Business Job Protection Act of 1996,” Pub. L. No. 104-188, sec. 1111(a) (1996). 
14 

II. ECONOMIC DATA 

A. Taxonomy of Aggregate Investment in the United States 

The Bureau of Economic Analysis (“BEA”) of the Department of Commerce estimates 

annual investment in the United States as part of the BEA’s measurement of gross domestic 

product. The amount of annual investment in the United States is large, averaging more than 

$1.5 trillion dollars annually during the period 1998 through 2002. Table 2 and Table 3 present 

the BEA’s estimates of the capital investment by type of asset, by industry, and by organizational 

form. These data are compiled from various surveys that report on investment in equipment and 

structures by industry, by legal form. The data are further broken down into asset categories 

based on more detailed periodic surveys. 

Table 2 breaks private fixed investment down into type of equipment or software, and 

type of structure. As shown, the largest category, other than structures, is computer software 

($162 billion in 2002), followed by communication equipment ($89 billion in 2002), computers 

and computer peripheral equipment ($81 billion in 2002), and trucks, buses, and truck trailers 

($61 billion in 2002). Table 3 reports that investment in the manufacturing industries comprised 

15.6 percent ($165 billion out of $1,060 billion) of the total of private nonresidential fixed 

investment in 2002. Corporations (both C corporations and S corporations) account for the 

majority of nonresidential investment, $866 billion of the total $1,060 billion, or 82 percent. 
15 

Table 2.−Investment in Private Fixed Assets, Equipment and Software, 

and Structures by Type

[Billions of Dollars, Calendar Years] 

1998 1999 2000 2001 2002

Private fixed investment .......................................... 1,560.8 1,441.9 1,680.9 1,643.6 1,564.0 

Equipment and Software

1. Computers and peripheral equipment........................ 86.9 95.7 101.2 85.2 81.2 

2. Software...................................................................... 124.0 152.6 176.2 174.7 161.7 

3. Communication equipment......................................... 87.4 99.3 124.1 110.1 88.6 

4. Medical equipment and instruments........................... 30.1 31.7 34.4 37.4 39.8 

5. Nonmedical instruments............................................. 17.0 16.9 17.8 18.1 17.1 

6. Photocopy and related equipment.............................. 12.5 10.4 9.6 6.7 7.0 

7. Office and accounting equipment............................... 5.2 4.0 4.1 4.7 5.0 

8. Fabricated metal products.......................................... 11.0 11.8 12.4 12.5 12.6 

9. Engines and turbines.................................................. 4.4 5.5 7.1 10.8 10.1 

10. Metalworking machinery............................................. 30.1 29.3 30.0 25.6 23.3 

11. Special industry machinery, not elsewhere

classified..................................................................... 33.4 32.9 36.4 30.6 27.9 

12. General industrial, including materials 

handling, equipment.................................................... 47.3 45.7 48.6 44.4 42.4 

13. Electrical transmission, distribution , and

industrial apparatus..................................................... 20.1 21.8 24.7 22.8 22.3 

14. Trucks, buses, and truck trailers................................. 79.4 89.5 81.8 65.1 60.8 

15. Autos........................................................................... 35.0 37.8 36.8 31.0 28.0 

16. Aircraft......................................................................... 20.8 30.3 32.6 35.2 24.3 

17. Ships and boats.......................................................... 2.8 2.8 3.4 3.0 3.6 

18. Railroad equipment..................................................... 6.5 7.1 6.5 4.6 4.4 

19. Furniture and fixtures.................................................. 32.7 34.5 36.3 32.9 30.7 

20. Agricultural machinery................................................ 16.9 12.4 13.7 14.6 16.5 

21. Construction machinery.............................................. 22.4 22.9 23.2 20.4 21.1 

22. Mining and oil field machinery..................................... 3.6 5.4 5.3 6.2 4.8 

23. Service industry machinery......................................... 16.5 17.5 17.5 17.6 16.7 

24. Electrical equipment, not elsewhere classified........... 4.4 4.3 4.6 5.0 4.8 

25. Other nonresidential equipment.................................. 31.1 32.2 33.9 34.4 35.2 

26. Residential equipment................................................ 6.6 7.0 7.4 7.4 7.5 

Total of Equipment and Software .............................. 861.6 788.2 929.7 860.9 797.2 

Nonresidential structures

1. Commercial, office and health care............................ 115.2 124.0 137.2 137.4 116.0 

2. Manufacturing............................................................. 40.3 32.5 31.7 29.2 16.1 

3. Power and communication......................................... 34.3 40.2 47.0 49.7 49.2 

4. Petroleum and natural gas.......................................... 22.3 19.5 25.8 37.8 28.0 

5. Mining......................................................................... 1.1 1.0 1.3 1.3 1.2 

6. Farm........................................................................... 4.3 5.1 6.0 5.1 5.8 

7. Other........................................................................... 57.0 59.1 62.7 60.3 53.9 

Total of Nonresidential Structures ........................... 281.4 274.5 311.7 320.8 270.2 

Residential structures ............................................. 417.8 379.3 439.5 461.9 496.6 

Source: Bureau of Economic Analysis

Asset Type
16 

Table 3.−Investment in Private Nonresidential Fixed Assets by Industry 

Group and Legal Form of Organization 

[Billions of Dollars, Calendar Years] 

1998 1999 2000 2001 2002

 I. Private Nonresidential Fixed Investment

A. Equipment and Software.................................... 854.6 781.6 922.3 853.5 789.7 

B. Structures......................................................... 281.4 274.5 311.7 320.8 270.2 

Total of Private Nonresidential Fixed Investment ...... 1,056.1 1,136.0 1,234.0 1,174.4 1,059.9 

 II. Industry Group

A. Farms

1. Equipment and software....................................... 19.4 23.8 20.8 21.9 23.4 

2. Structures......................................................... 2.6 3.1 4.1 4.7 3.8 

Total of Farms ................................................... 22.5 26.4 24.9 26.6 27.2 

B. Manufacturing

1. Equipment and software....................................... 165.3 171.8 169.8 157.5 146.5 

2. Structures......................................................... 26.5 26.5 28.3 29.2 18.4 

Total of Manufacturing ....................................... 191.8 198.3 198.1 186.7 164.9 

C. Nonfarm, Nonmanufacturing

1. Equipment and software....................................... 670.0 586.0 731.7 674.1 619.8 

2. Structures......................................................... 245.3 251.7 279.3 286.9 248.0 

Total of Nonfarm, Nonmanufacturing .................. 921.7 831.4 1,011.1 961.0 867.8 

 III. Legal Form of Organization

A. Corporate

1. Equipment and software....................................... 732.6 664.4 793.2 727.0 665.9 

2. Structures......................................................... 205.7 211.2 237.0 245.6 200.4 

Total of Corporate............................................. 943.9 870.2 1,030.2 972.6 866.3 

B. Noncorporate

1. Sole Propietorship

a. Equipment and software.................................... 48.7 48.8 50.4 48.5 47.9 

b. Structures...................................................... 13.7 12.6 14.9 14.4 12.0 

Total of Sole Propietorship.................................... 62.4 61.4 65.3 62.9 59.9 

2. Partnership

a. Equipment and software.................................... 35.1 32.2 36.7 35.1 33.5 

b. Structures...................................................... 19.4 18.6 20.4 18.9 16.1 

Total of Partnership............................................. 54.5 50.8 57.1 54.0 49.6 

3. Nonprofit institutions

a. Equipment and software.................................... 35.9 34.2 39.3 40.4 40.2 

b. Structures...................................................... 35.1 35.7 37.3 40.2 40.1 

Nonprofit institutions............................................. 70.9 69.9 76.7 80.6 80.4 

4. Households....................................................

a. Equipment and software.................................... 0.7 0.6 0.5 0.5 0.5 

b. Structures...................................................... 1.3 1.3 1.3 1.0 0.8 

Total of Households............................................. 2.0 1.9 1.8 1.5 1.4 

5. Tax-exempt cooperatives

a. Equipment and software.................................... 1.6 1.4 2.1 1.9 1.7 

b. Structures...................................................... 0.6 0.5 0.8 0.8 0.7 

Total of Tax-exempt cooperatives........................... 2.3 1.9 3.0 2.7 2.4 

Subtotal of Equipment and software........................ 121.9 117.2 129.2 126.5 123.8 

Subtotal of Structures.......................................... 70.1 68.7 74.7 75.3 69.8 

Total of Noncorporate....................................... 185.9 192.1 203.9 201.7 193.7 

Source: Bureau of Economic Analysis

Asset Type
17 

B. Investment Subject to Tax Expensing or Depreciation 

Investment as estimated by the BEA and reported in Table 2 and Table 3, above, does not 

correspond to investment subject to expensing under section 179 or depreciation under MACRS. 

There are several reasons for the difference between what constitutes depreciable investment by 

taxpayers and what the BEA estimates as investment for the purpose of measuring the nation’s 

gross domestic product. First, from the taxpayer’s perspective, an expenditure is chargeable to 

the taxpayer’s capital account regardless of whether the item purchased is new or used. Thus, 

investment for tax purposes encompasses purchases of both new and used equipment and 

structures. For purposes of measuring gross domestic product, only acquisitions of new 

equipment and structures are generally relevant.39 Also, for purposes of measuring gross 

domestic product, the BEA estimates investments by tax-exempt persons (see for example 

“nonprofit institutions” in Table 3) and investments in owner-occupied housing. Generally, the 

cost of such investments is not recoverable under federal income tax law. Some expenditures 

that the BEA labels as “investment” are not recoverable by taxpayers under section 179 

expensing or MACRS. For example, software sold separately generally is amortized as an 

intangible rather than depreciated, although certain software is eligible for section 179 expensing 

for taxable years beginning in 2002 through 2007.40 

Table 4, shows the distribution of investment as it appears on tax depreciation schedules 

for the period 1998 through 2002.41 Throughout this period, investment in equipment in the 5-

year MACRS class is the largest component of investment, followed by investment in nonresidential structures, and investment in equipment in 7-year MACRS class. The allowance for 

bonus depreciation (“special depreciation allowance” in the table) makes direct comparison of 

aggregate investment by MACRS class problematic for 2001 and 2002. 

 39 BEA does adjust its estimate of investment for the net purchase or sale of used property 

between the business sector and any other sector of the economy. 

40 Software included with a computer is recovered as a part of the computer and BEA uses this 

same method. 

41 These data omit listed and alternative depreciation system property. The data were compiled 

by combining reported investment across all business forms and adjusting for potential double counting. 

For example, section 179 expensing would be double-counted on pass-through returns and S corporation 

returns and on the returns of the underlying partners or shareholders. Thus, only the section 179 

deduction on individual Form 1040 and C corporation returns is included in measuring section 179 

expensing). 
Table 4.−Investment by Depreciation Method, Tax Return Data[1] 

[Billions of Dollars, Tax Years] 

1998 1999 2000 

Equipment

1. S179................................................................................................................ 25.0 27.9 27.5 

 

2. Special depreciation allowance....................................................................... --- --- --- 

 

3. MACRS class

3 years............................................................................................................ 29.3 33.2 31.0 

 

5 years............................................................................................................ 344.9 366.4 380.9 

 

7 years............................................................................................................ 209.7 231.5 226.0 

 

10 years.......................................................................................................... 18.4 17.7 22.7 

 

15 years.......................................................................................................... 46.3 53.4 64.6 

 

20 years.......................................................................................................... 27.0 37.0 39.8 

 

25 years.......................................................................................................... 1.4 2.0 2.5 

 

Total of Equipment .............................................................................. 702.1 769.1 795.0 

 

Structures

1. Non-residential .............................................................................................. 230.8 241.7 242.4 

 

2. Residential .................................................................................................... 125.2 137.6 150.7 

 

Total of Structures .............................................................................. 356.0 379.3 393.1 

 

 NET TOTAL ......................................................................................................... 1,148.4 1,058.1 1,188.1 

 

Source: Compiled from Depreciation and Amortization Form 4562 as included with original tax returns (sole proprietor, farm, rental, partne

returns) as edited by the Statistics of Income Division of the Internal Rervenue Service.

[1] Table excludes listed property, amortized property, and property recovered under the alternative depreciation system.

Depreciation Class

18
19 

In addition to the differences previously noted between investment for the purpose of 

measuring gross domestic product and for the purpose of cost recovery under federal income tax 

law, the annual aggregates reported in Table 4 and Table 2 and Table 3, above, are not 

comparable because Table 4 reports investment on a tax year basis, rather than a calendar year 

basis. Another facet of the data creating non-comparability arises because, for federal income 

tax purposes, investment generally is reported when the property acquired is placed in service. 

In the BEA estimates, expenditures across years related to a single investment (e.g., construction 

of an office building) are reported in the year in which the expenditure takes place.