THE U.S. DEPARTMENT OF THE TREASURY

THE CASE FOR TEMPORARY 100 PERCENT EXPENSING:

ENCOURAGING BUSINESS TO EXPAND NOW BY LOWERING THE

COST OF INVESTMENT

A Report By The U.S. Department of the Treasury’s Office of Tax Policy

OCTOBER 29, 2010 

 
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The Case for Temporary 100 Percent Expensing: 

Encouraging Business to Expand Now By Lowering the Cost of Investment 

Since Day One, The President Has Enacted Targeted Tax Cuts To Encourage Private-Sector Investment:

Since taking office, the President has signed into law a number of tax cuts that provide incentives for private 

sector investment – including 16 tax cuts targeted at small businesses. For example: 

• The Recovery Act and Expansion of Net Operating Loss (NOL) Carryback Advanced $109 Billion 

in Business Tax Cuts in 2009 and 2010: The American Recovery and Reinvestment Act (Recovery Act) 

included major tax cuts for businesses, including 50 percent bonus depreciation, which allowed for an 

immediate deduction of half the cost of certain investments. Along with the additional expansion of the 

NOL carryback period that the President signed last November, these actions advanced more than $109 

billion of business tax cuts in 2009 and 2010. 

• The Small Business Jobs Act Accelerated $55 Billion in Tax Relief Through the Next Year: On 

September 27, President Obama signed the Small Business Jobs Act, which extends the Recovery Act 

provision for 50 percent bonus depreciation through 2010 and increases the amount of investments that 

small businesses can immediately expense through 2011. In total, the bill accelerates $55 billion of tax 

relief through next year. 

100 Percent Expensing Is the Next Step to Get Business Investment Off the Sidelines: The President’s 

proposal allows businesses to deduct immediately the full cost of qualified capital investments made between 

September 8, 2010 – when the proposal was announced – and the end of 2011. Full expensing will: 

• Accelerate An Additional $150 Billion in Tax Relief Over the Next Two Years: 100 percent expensing 

would put an additional $150 billion in tax relief in the hands of businesses over the next two years – for a 

total of $200 billion in relief when combined with expensing provisions in the Small Business Jobs Act. 

• Provides Tax Cuts to 2 Million Businesses: The President’s proposal is expected to provide tax cuts to 2 

million businesses, small and large. 

• Recover Much of the Cost Over Time: The President’s proposal allows businesses to receive deductions 

up front that they would otherwise receive over several years – encouraging investment now, while also 

allowing much of the reduced revenues to be recouped in future years. In total, the net cost of the proposal 

is expected to be less than $30 billion over ten years. 

100 percent expensing of qualified capital – also known as 100 percent bonus depreciation – through 2011 would: 

• Accelerate $150 billion in tax cuts to 2 million businesses: 100 percent expensing will accelerate $150 billion in 

tax cuts to 2 million businesses – providing $200 billion in relief over the next two years when combined with 

small business expensing and bonus depreciation provisions the President signed into law last month. 

• Lower the average cost of capital for business investment by more than 75 percent: Through temporary 100 

percent expensing, Treasury estimates that businesses’ average cost of capital on new investments will fall from 

7.18 percent to 1.68 percent – providing an incentive to pursue a broader range of investments through the end of 

2011

• Produce about $50 billion in new investment: Studies of similar tax cuts in the past have found they encouraged 

businesses to increase targeted investments. Based on the results of one such study, Treasury estimates 100 

percent expensing could support $50 billion in new investment, while other outside estimates have projected an 

even larger impact.
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100 Percent Expensing Lowers Businesses’ Cost of Capital by an Average of Over 75 Percent: Implementing 

temporary 100 percent expensing of capital investments will: 

• Lower the Average Cost of Capital for Business Investment: Treasury analysis finds that temporary 

100 percent expensing reduces the average cost of capital across all business investment from 7.18 percent 

to 1.68 percent. This reflects a reduction in the rate of return a business must expect – before taxes – for it 

to choose to invest, thus expanding the range of investments it would be willing to make by the end of 

2011. 

100 Percent Expensing Builds Off the Demonstrated Effectiveness of Past Expensing Programs: Evidence 

from past, less substantial changes in bonus depreciation shows that expensing can have “a powerful effect on 

the composition of investment” while in effect. For example:

• Previous Research on More Modest Bonus Depreciation Policies Found A Significant Impact on 

Investment. One recent study found that the 2002 and 2003 bonus depreciation policies – which 

provided a smaller incentive for investment than the President’s proposal – had “noticeable effects on 

the economy,” with “capital that benefited substantially from the policy” seeing “sharp increases in 

investment.” An estimate applying the results of that study to today’s economy and taking account of the 

President’s more generous proposal suggests that 100 percent expensing would increase investment by 

roughly $50 billion next year, while other outside estimates have projected an even larger impact. 

• 100 Percent Expensing Increases the Impact on Investment and Growth Compared to Past 

Provisions: By providing for 100 percent expensing through the end of 2011, the President’s proposal 

expands the incentives for new investment compared to partial bonus depreciation, increasing its likely 

effectiveness compared to past proposals. 

• Expensing Disproportionately Helps Industries Especially Hard-Hit by the Recession: The 

President’s proposal would spur investments at a time when spending on equipment and software has 

not yet recovered compared to pre-recession levels.

Example of How 100 Percent Expensing Provides an Incentive to Invest: Consider a business that makes $1 million 

of additional investments in new equipment that typically have a 7-year recovery period. Under current law, the 

business would only be able to deduct a fraction of its investment each year – about $143,000 in the first year, for 

example. At a tax rate of 35 percent, that would reduce the business’ taxes in the first year by $50,000. By contrast, 

under immediate 100 percent expensing, the business could deduct all $1 million in the first year – reducing the 

business’ taxes by $350,000.

Not only does this provide the business with more cash on hand this year – money that can be used to expand and hire 

new workers – but because businesses value cash today more than cash in the future, immediate expensing also makes 

the investment more attractive. For example, using a “discount” rate of 6 percent, the value of deducting $1 million in 

the first year might be worth the full $350,000 for the business – but the value of deducting it over the entire 7-year 

recovery period would only be about $303,000, reflecting the added incentive the business receives with immediate 

expensing. The incentive only grows more powerful as the recovery period grows longer, and for long-lived 

investments that are made based on expectations of demand over a number of years, tax incentives to invest now can 

have particularly strong effects on investment timing. 
Introduction

President Obama has proposed to allow businesses and investors to deduct immediately 

the full cost of most investments in new depreciable tangible property, other than buildings, for 

purposes of computing taxable income. This policy – known as 100 percent expensing or 100 

percent bonus depreciation – would apply to productive capital investments by businesses large 

and small in items ranging from new delivery trucks or factory machinery. Normally, the costs 

of such productive assets are capitalized (i.e., they are not deductible immediately as “ordinary 

business expenses”) because they provide benefits for years into the future. The capitalized costs 

generally are recovered through regular depreciation deductions taken over a specified number of 

years. 

Depreciation deductions are intended to assist in the proper measurement of taxable 

income by reflecting predictable reductions in the value of installed income-producing property 

that occur due to normal wear-and-tear and obsolescence. A policy of allowing an immediate 

deduction (or “expensing”) of investment costs has an alternative rationale, which is to lower the 

effective tax rate on income derived from business investments, and thereby encourage 

additional demand for capital goods. Furthermore, a policy of allowing expensing only on a 

temporary basis is directed specifically at investments that might be made sooner in order to 

enhance aggregate demand for goods and services during a period of slower growth. By 

providing an immediate window of opportunity in which the costs of investing in qualified 

property are lower, a temporary expensing policy encourages firms to shift investment that might 

otherwise be put off to later years into the temporary, lower cost window. By shifting 

investment demand in this manner, it is intended that aggregate economic activity will increase 

during the current slower-growth period, and thereby speed and enhance economic recovery and 

job growth. 

Effectiveness of 100 Percent Expensing in the Current Environment 

Enactment of temporary 100 percent expensing would likely have a noticeable effect on 

the economy in the short term. There is significant economic slack in equipment-producing 

industries, as investment fell below replacement levels during the recession and businesses have 

remained cautious about investing during the current recovery. 

Economists have studied the effects of previous expensing proposals from national 

accounts data and found effects that range from near zero to noticeably positive. One recent 

study of the less-generous bonus depreciation policies in 2002 and 2003, suggests that they had 

“noticeable effects on the economy,” with “capital that benefited substantially from the policy” 

seeing “sharp increases in investment.” The study also estimated that, for the economy as a 

whole, the policies may have increased GDP by $10 to $20 billion and been responsible for the 

creation of 100,000 to 200,000 jobs. Extrapolating from that study to today’s economy and 

taking account of the President’s more generous proposal suggests that 100 percent expensing 
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would increase investment by roughly $50 billion next year.1 Other outside estimates have 

suggested an even larger impact.2 

 These empirical findings are consistent with theoretical research, which suggests that 

businesses will have strong incentives to make investments sooner in response to a temporary 

expensing provision. The current proposal for 100 percent bonus depreciation should have a 

larger impact on the economy than past enactments of bonus depreciation, which allowed for 

only 30 or 50 percent immediate expensing. 

Similarly, the Congressional Budget Office (CBO) notes that a temporary expensing 

policy would lead some businesses to accelerate their purchases of capital goods and that the 

policy would have its biggest impact just before it expired, as firms would accelerate equipment 

purchases from subsequent years to take advantage of the credit. The CBO estimates that 

allowing full or even partial expensing would raise output cumulatively between 2010 and 2015 

by $0.20 to $1.00 per dollar of total budgetary cost.3

The proposal for 100 percent bonus depreciation comes at an appropriate moment in the 

business cycle, when firms may be cautious about expanding due to concerns about future 

demand. Business spending on equipment and software fell almost 20 percent during the 

recession (from the end of 2007 through the middle of 2009). At this rate, business investment 

was not even high enough to replace depreciating capital; the net stock of business equipment 

and software actually fell in 2009, for the first time since World War II. Despite increasing since 

the middle of 2009, equipment and software spending has not fully recovered (and is still more 

than 7 percent below 2007Q4). 

Providing incentives to invest in productive assets would help to maintain the recovery 

and would likely help the manufacturing sector, which is currently below normal levels of 

capacity utilization. Capacity utilization in durable goods manufacturing averaged 70 percent in 

2010Q3, well below the more than 76 percent average during the past 20 years. 

                                                           

1 Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation. Christopher L. House and 

Matthew D. Shapiro American Economic Review 2008, 98:3, 737–768. See also their National Bureau of Economic 

Research Working Paper No. 12514, p. 32, for estimates of the effect on investment. Professors House and Shapiro 

estimate that a 50 percent bonus depreciation plan would increase investment by 1.8 percent in the first quarter and 

continue to rise thereafter for the rest of the year. If we assume 1.8 percent higher investment and use today’s 

investment levels, and double the bonus depreciation amount, we estimate that investment would rise by around $50 

billion. 

2

 See, for example, Kevin A. Hassett and Glenn Hubbard, “Obama Discovers Incentives,” Wall Street Journal, Sept. 

10, 2010. 

3 Statement of Douglas W. Elmendorf, Director, Congressional Budget Office, “Policies for Increasing Economic 

Growth and Employment in the Short Term”, prepared for the Joint Economic Committee U.S. Congress February 

23, 2010.
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Temporary versus Permanent Expensing 

The economic effects of a temporary expensing proposal may differ from those of a 

permanent expensing provision. Whether temporary or permanent, as described below, the 

ability to expense depreciable capital implies that the effective tax rate on the normal return 

earned from a qualified investment will be zero, or near zero. Income earned from short-lived 

property such as high-tech manufacturing equipment, is effectively taxed at the same rate as 

income earned from long-lived property, like an electric utility distribution plant; it is zero, or 

near zero, in both cases. Under a temporary expensing policy, however, assets with different 

rates of depreciation may be treated differently because of incentives created by moving from 

one tax regime to the other. A permanent expensing policy provides no incentive to shift 

investment over time because businesses receive the same potential benefits from one year to the 

next. A temporary provision, however, creates an incentive to shift investment into the window 

of opportunity, and, moreover, this incentive is greater for long-lived property. 

If a future expensing policy is anticipated prior to its effective date, then there is an 

incentive to delay investment until the more favorable tax regime becomes effective (which is 

why the President’s proposal is intended to be effective from the announcement date). If a 

temporary expensing policy is ending, then an incentive exists to shift investment from the future 

into the tax benefit window. These timing incentives are greatest for long-lived property because 

the value of a long-lived asset (not including any tax benefits from immediate expensing) is 

determined primarily by anticipated returns to capital that are long-term and therefore outside of 

the policy window, so the investment’s current value is little affected by short-run considerations 

and events. For example, an advance by one year in the timing of a 20-year asset does not 

materially affect the value of the 20 years of cash flows that are expected by the business; the 

relatively small perturbation in the stock of capital over a short window of opportunity will have 

only a small effect on future cash flows. On the other hand, the value of a three-year asset could 

be materially impacted by shifting investment through time, since a larger proportion of its future 

cash flow is affected by changes in the current stock of capital.4

 This result is dependent on the 

length of the temporary tax benefit window, since the longer an expensing policy is in place, the 

greater will be the impact of that policy on the stock of capital and, thus, on the value of new 

investments. 

The incentive effect to shift investment through time has also been modeled as a 

temporary reduction in the cost of capital at the end of the window of opportunity (and an 

increase in the cost of capital in the period before the start of the window of opportunity, if the 

                                                           

4 In economic parlance, the temporary investment demand for the long-lived asset is highly elastic, and the amount 

of new investment shifted into the window of opportunity is determined mainly by the elasticity of supply for the 

long-lived capital good. The elasticity of the demand curve for the short-lived asset is far less, and so a given 

change in the tax cost of investing (shifting that demand curve) will have a smaller quantitative effect on the amount 

of equilibrium investment.
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change in policy is anticipated beforehand).5 Cost of capital, net of depreciation, is defined as 

the minimum real pre-tax anticipated rate of return required by owners of capital in order to 

undertake an investment of given risk. Table 1 shows estimates of the cost of capital for a 

qualifying equipment aggregate in the final year of a period of temporary bonus depreciation, 

where it is believed the expensing policy will end at the end of the year. Table 1 shows these 

results for 30 percent, 50 percent, and 100 percent bonus depreciation regimes. The 

“Temporary” columns in Table 1 indicate the strong incentive effect of 100 percent bonus 

depreciation to shift investment into the tax benefit period. The temporary cost of corporate 

capital actually becomes negative for qualified investments, and the cost of capital for all 

corporate capital falls to less than one percent. This larger impact of the temporary expensing 

provisions reflects the fact that purchases of productive assets within the window are far more 

valuable than similar purchases of capital assets made just outside the window (and the after-tax 

rate of return on similar assets must be similar to prevent arbitrage). Note that the effect for 

long-lived corporate structures is greater than that for short-lived corporate equipment, consistent 

with the discussion above. The average cost of capital for all business capital is reduced to only 

1.7 percent under a temporary proposal for 100 percent bonus depreciation compared to over 7 

percent without bonus depreciation. So, for example, an average business that expects it could 

receive a 6.5 percent rate of return on an investment might choose to invest before the end of 

2011 under a 100 percent expensing regime, even though it would likely not invest in the 

absence of expensing. 

How Expensing Lowers Effective Tax Rates and the Cost of Capital 

Allowing 100 percent bonus depreciation is economically equivalent to full expensing of 

depreciable asset purchases, because it allows a complete write-off of the cost of eligible 

property in the year in which the property is placed in service.6 Expensing a capital expenditure 

means the government effectively finances a portion of the investment’s cost (in the form of a 

reduction in current taxes). For example, consider a company operating in flow-through tax 

form (e.g., a partnership or S corporation), the profits of which are taxed at a 25 percent tax rate. 

Pursuant to 100 percent bonus depreciation, the company effectively shares 25 percent of any 

qualifying investment’s cost with the Federal government. The Federal government also 

receives, through income taxes, 25 percent of cash receipts (net of non-depreciation expenses) 

generated by the investment, so, in effect, there is no tax imposed on the income representing the 

taxpayer’s investment “share” of the return from a marginal investment that a business is 

otherwise indifferent about making (unless tax rates change over time). Thus, for non-corporate 

businesses (which incur only a single level of tax), the expected income from an on-the-margin 

expensed investment in depreciable property is taxed at an effective rate of zero, and the 

                                                           

6

 There are some important differences between the President’s 100 percent bonus depreciation proposal and the 

current small business expensing provision. See Appendix 1 for a comparison of 100 percent bonus depreciation 

and small business expensing provisions. 
- 8 -

minimum pre-tax rate of return required from such an investment is equal to the after-tax rate of 

return demanded by the firm to induce it to invest in tangible property. In other words, with full 

expensing, there is no additional tax burden imposed on a firm’s marginal investment activity in 

qualified assets. However, income tax will still be paid on rates of return greater than the 

required rate of return (so-called above normal returns). With a zero effective tax rate, the tax 

system does not discriminate between different types of qualified depreciable property; 

expensing thus is “neutral” as regards assets with differing rates of depreciation, even if the 

correct values of those rates of depreciation are unknown. 

The above analysis applies to any so-called “pass through” business, which does not pay 

an entity-level tax (e.g., the corporate income tax). For a corporation, the analysis is similar, 

although the multiple levels of taxation on corporate income complicate the matter. In the case 

of corporations, taxes on dividends and capital gains may raise the effective tax rate above zero, 

but the advantages of debt-financing under a corporate tax (if the combined tax rate on corporate 

earnings exceeds the shareholder’s tax rate on interest) may actually reduce the overall effective 

tax rate under expensing below zero (depending, in part, on the degree to which the investment is 

financed using debt). 

Impact on Effective Tax Rates

Table 1A shows estimates of the marginal effective tax rate for various types of 

qualifying property under a single year temporary bonus depreciation policy, where it is believed 

the expensing policy will end at the end of the year. Table 1A shows these results for 30 percent, 

50 percent, and 100 percent bonus depreciation regimes. The estimates indicate the strong 

incentive effect under 100 percent bonus depreciation to shift investment into the tax benefit 

period. The temporary marginal effective tax rate for qualified corporate investments is 

negative, and largely so, and the marginal effective tax rate for all corporate capital (including 

both qualifying property and property not qualifying for bonus depreciation) is reduced to less 

than three percent. The marginal effective tax rate for all business capital, in both corporate and 

noncorporate form, is reduced to only 4 percent under a temporary proposal for 100 percent 

bonus depreciation – 86 percent less than the tax rate with no depreciation.7

Impact on the Cost of Capital 

As stated above, the cost of capital, net of depreciation, is the minimum real pre-tax 

anticipated rate of return required by owners of capital in order to undertake an investment of 

given risk: the lower the cost of capital, the greater the probability that a given investment will be 

seen as being profitable and therefore will be made. Figure 1 shows graphically the impact on 

the corporate cost of capital for a number of assets with different depreciation recovery periods 

                                                           

7

 See Auerbach and Hassett (1992). Such estimates assume that taxpayers truly expect the program to end, and do 

not expect it to be revived any time soon. To the extent this is not a widely shared perception, the relevant marginal 

effective tax rates will be significantly higher. 
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under current law, assuming a regime of 30 percent, 50 percent, and 100 percent bonus 

depreciation, as estimated by the Treasury’s Office of Tax Analysis. The figure indicates the 

percent difference in the cost of capital between current law without bonus depreciation and the 

bonus depreciation alternative. The general upward slopes of the curves indicate that short-lived 

assets are generally more heavily taxed under current law than are long-lived assets. 

Table 1 reports the cost of capital for aggregate types of assets under current law without 

bonus depreciation and under the three separate bonus depreciation regimes. Under a temporary 

100 percent bonus depreciation tax regime, the cost of corporate capital varies among qualified 

assets, but would be at least 150 percent lower than under current law without bonus 

depreciation. Because other corporate assets are not qualified, however, the impact on corporate 

investments overall is less, albeit still quite substantial – about an 87 percent drop in the required 

pre-tax return. The cost of capital for investments by non-corporate firms would also fall 

substantially from current law (a decrease of 59 percent). For all business investment, as 

estimated here, temporary full expensing would result in a cost of capital in 2011 that is about 77 

percent less than without bonus depreciation. 

Previous Experience with Bonus Depreciation 

Bonus depreciation has been used effectively to spur economic growth in the past. In 

particular, during periods where economic uncertainty has negatively affected investment 

activity, even lesser amounts of accelerated depreciation have had a measurable effect. For 

example, when businesses were afraid to spend or invest after the terrorist attacks of September 

11, 2001, Congress enacted a provision that allowed an additional first-year depreciation 

deduction for “qualified property” equal to 30 percent of a newly acquired asset’s cost.8

 Regular 

depreciation deductions were then computed on the remaining 70 percent of the capitalized cost 

of qualified property.9

 In 2003, the bonus depreciation deduction was increased to 50 percent for 

qualified property acquired after May 5, 2003, and before January 1, 2005. While this general 

                                                           

8

 Specifically, qualified property included (and still includes) property that has a recovery period for tax depreciation 

purposes of 20 years or less, purchased computer software, water utility property, and qualified leasehold 

improvements. For the property to qualify for bonus depreciation, the original use of the property must begin with 

the taxpayer and the property must be acquired and placed in service within certain time periods (which have 

changed over the years). Qualified property does not include property predominantly used outside the U.S. Certain 

assets having relatively long production periods were given an additional year to be placed in service, but only the 

portion of basis attributable to the period before January 1, 2005, qualified for bonus depreciation. Qualified 

property to be used in the designated New York Liberty Zone was given a December 31, 2006, placed-in-service 

deadline. The New York Liberty Zone provision also allowed bonus depreciation for the rehabilitation or 

replacement of buildings that had been destroyed or condemned as a result of the September 11, 2001, terrorist 

attack. An additional three years was allowed for completion of such investment. 

9

 The degree of expensing under “30-percent” bonus depreciation is actually greater than 30 percent. For example, 

property normally depreciated using a seven-year recovery period is allowed a first-year allowance equal to 1/7, or 

14.286 percent, of a property’s initial cost. Since this allowance is applied to the asset’s adjusted basis after 

accounting for the 30-percent “bonus” allowance, the full first-year write-off for seven-year property is 40 percent 

(30 percent, plus (1/7) × (1-30 percent) of the property’s cost. Similarly “50-percent” bonus depreciation yields 

first-year write-offs that typically are greater than 50 percent. 
- 10 -

provision was allowed to terminate at the end of 2004, 50 percent bonus depreciation was 

extended to qualified property placed in service in the Gulf Opportunity Zone (GO Zone) in the 

aftermath of Hurricanes Katrina, Rita, and Wilma.10 In response to the recession that started in 

2007, Congress reinstituted 50 percent bonus depreciation for qualified property acquired and 

placed in service in 2008, and the American Recovery and Reinvestment Tax Act of 2009 

extended its availability to qualified property placed in service through 2009. More recently, the 

Small Business Jobs Act, which the President signed into law last month, extended 50 percent 

bonus depreciation through 2010. In September, the President proposed to increase the rate of 

bonus depreciation to 100 percent for property acquired after September 7, 2010, and to extend 

the placed-in-service deadline to December 31, 2011. 

Preliminary data from the 50 percent bonus depreciation in effect in 2008 demonstrate 

that in one year alone, businesses took almost $204 billion in deductions.11 A study of large 

corporations (those claiming depreciation deductions in excess of $100,000) under the 2001-

2004 period of bonus depreciation at 30 percent and 50 percent found that firms electing to use 

bonus depreciation were much more likely to have positive net income; indeed, the average net 

income of firms not utilizing any bonus depreciation was negative in 2002 and 2003 and only 

slightly positive in 2004. The study also reported that net operating loss deductions and tax 

credits reduced the tax liability of firms not using bonus depreciation by about 60 percent, 

compared to a 30 percent reduction for firms using bonus depreciation, so that businesses not 

using bonus depreciation generally had other means by which their tax liabilities could be 

reduced or eliminated. 

Among businesses claiming some bonus depreciation, bonus deductions were elected for 

between 71 percent (in 2002) and 77 percent (in 2004) of eligible investment.12 Reasons why 

these “take up rates” were not closer to 100 percent are not completely known. There may also 

have been issues related to how the eligible investment data were estimated.13 Firms may have 

been reluctant to claim bonus depreciation because it provided limited benefits for financial 

                                                           

10 The Gulf Opportunity Zone bonus depreciation provision also applied to investments in buildings placed in 

service on or before December 31, 2008. In 2008, similar rules were extended to any federally declared disaster 

occurring before January 1, 2010, where taxpayers had approximately three years to acquire qualifying property 

(four years in the case of buildings). 

11 See Table 2, attached, for corporate deductions of $132 billion; pass-through business entities took an additional 

$72 billion for a total of $204 billion. 

12 Knittel (2007,Table 5). These “take-up rates” for bonus-using firms imply that take-up rates (in terms of dollars 

of eligible investment) were between 54 percent (in 2002) and 61 percent (in 2004) of all eligible investment, taking 

into account firms that elected not to participate at all in bonus depreciation. Preliminary corporate tax data indicate 

even lower overall take-up rates for 2008. 

13 For example, to estimate eligible investment, it was assumed that 5 percent of all investment was ineligible used 

property. This percentage may have been an underestimate. 
- 11 -

reporting purposes14 or because State income tax laws were not conformed to this aspect of 

Federal income tax law. 

The 100 percent bonus depreciation proposal should provide a large enough incentive to 

encourage higher take-up and overcome many of these obstacles that kept firms from taking full 

advantage of the earlier incentives, moving take-up rates closer to 100 percent. 

Use of Bonus Depreciation by Industry 

The greatest bonus depreciation deductions have occurred in those industries that have 

the largest investments in depreciable property.15 In 2008, manufacturers claimed 22 percent of 

all bonus depreciation deductions, while the information industry and utilities claimed 15 percent 

and 11 percent of bonus depreciation deductions, respectively. Service industries (other than 

finance, real estate, and leasing) claimed more than 14 percent of such deductions. Percentages 

reflecting each industry’s ratio of bonus depreciation deductions to gross income, before 

deductions, are reported in the final column of Table 2. By this measure, the most intensive 

claimants of bonus depreciation allowances include rental and leasing firms, utilities, and mining 

and oil and gas extraction companies, followed by those in the wholesale trade and information 

industries. 

Conclusion 

 By substantially lowering the cost of capital for depreciable investments, the President’s 

proposal for temporary 100 percent bonus depreciation is designed to shift investment into 2010 

and 2011 that might otherwise be put off to later years. The increased investment activity is 

intended to spur the growth of incomes and jobs for Americans. To maximize the effectiveness 

of the incentive to contribute to the recovery, it has an expiration date at the end of 2011. 

 The weight of the empirical evidence is that temporary partial expensing under 30 

percent and 50 percent bonus depreciation in the past has produced a positive investment 

response. Temporary 100 percent bonus depreciation will have a much larger impact on 

companies’ costs of capital, as shown in Table 1, and should therefore produce an even greater 

investment response in 2011, especially for longer-lived assets. 

 

                                                           

14 Hulse and Livingstone (2010, 11). 

15 See Table 2 of this Report. 
- 12 -

Figure 1 

Percent Difference in the Corporate Cost of Capital under Bonus Depreciation 

Relative to Without Bonus Depreciation 

By Current Law MACRS Recovery Period 

Assets with a 3-year recovery period include computer software and are depreciated using the 

straight-line method under current law without bonus depreciation. All other assets are 

depreciated using a declining-balance method: assets with 5-year, 7-year, and 10-year recovery 

periods are depreciated using the 200 percent declining balance method; and assets with 15-year, 

and 20-year recovery periods are depreciated using the 150 percent declining balance method. 

The user cost of capital is calculated assuming that firms have an additional depreciation 

deduction of 30 percent, 50 percent, or 100 percent of the cost of new capital goods in the first 

year the asset is placed in service. Under 30 percent and 50 percent expensing, the remaining 70 

percent or 50 percent of the cost, respectively, is recovered as under current law.

The user cost of capital is calculated assuming that firms and investors expect no change in tax 

laws. 

‐40.0

‐35.0

‐30.0

‐25.0

‐20.0

‐15.0

‐10.0

‐5.0

0.0

3 5 7 10 15 20

Percent

Recovery Period

30%

50%

100%
Table 1 

Cost of Capital Under Permanent and Temporary Bonus Depreciation1

Without With Bonus Depreciation 

Bonus 30 Percent 50 Percent 

Sector and Asset Type Depreciation Permanent Temporary2 Permanent Temporary2 Perm

Corporate Business 7.37% 7.16% 5.43% 7.02% 4.16% 6.6

Percent Difference3 -2.9% -26.3% -4.8% -43.6% -9Qualified Bonus Assets 

Equipment 6.82% 6.31% 3.50% 5.97% 1.30% 5.1

Percent Difference3 -7.4% -48.6% -12.4% -81.0% -24

Structures 6.49% 6.08% 0.093% 5.81% -2.79% 5.1

Percent Difference3 -6.3% -85.7 -10.5 -142.9% -21

Noncorporate Business 6.87% 6.80% 4.15% 6.76% 3.78% 6.6

Percent Difference3 -0.9% -39.6% -1.5% -44.9% -3

Total Business 7.18% 7.02% 4.93% 6.92% 4.01% 6.6

Percent Difference3 -2.1% -31.2% -3.6% -44.1% -7

Source: Office of Tax Analysis 1 Cost of capital is measured net of depreciation. 2 Cost of capital for the final year of temporary bonus depreciation, prior to transitioning back to a regime without bonus de

Auerbach and Hassett (1992). 

3 Percent difference in the cost of capital under respective bonus depreciation schedule (i.e., 30-, 50-, or 100-percent) relati

without bonus depreciation. 
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Table 1A 

Effective Marginal Tax Rates Under Temporary Bonus Depreciation1

Without 

Bonus With Bonus Depreciation 

Sector and Asset Type Depreciation 30 Percent 50 Percent 100 Percent 

Corporate Business 31.02% 24.29% 19.12% 2.46% 

Qualified Bonus Assets 23.92% 5.38% -13.00% -120.5% 

Equipment 25.41% 6.45% -12.63% -129.88% Structures 21.66% 3.76% -13.55% -106.28% 

Noncorporate Business 25.69% 13.35% 11.38% 5.61% Total Business 29.05% 20.59% 16.49% 3.96% 

Percent Difference2 -29.1% -43.2% -86.4% 

Source: Office of Tax Analysis 1 Effective marginal tax rates are calculated using a weighted average of current- and future-period user costs of capital under temporar

Temporary bonus depreciation is assumed to last for one year. The effective tax rates under temporary bonus depreciation are lower th

expensing because firms and investors must account for the anticipated reversion of the present value of depreciation back to its previoufuture-period user costs are weighted using a set of empirical weights that depend on the costs of adjustment. Auerbach and Hassett (19on future user costs for total equipment spending. A higher weight (and hence higher adjustment costs) is assumed for structures. See A(1992) and Cohen, Hansen, and Hassett (2002). 

2 Percent difference in the effective marginal tax rate under the respective bonus depreciation schedule (i.e., 30-, 50-, or 100-percent) re

marginal tax rate without bonus depreciation. 
Table 2 

Distribution of 50-Percent Bonus Depreciation Deductions for Corporations by Industry – Preliminary 2008 D

Bonus Depreciation Gross Income 

Deductions 

($billion) Share of Total 

Amount 

($billion) Share of 

Agriculture, Forestry, Fishing and Hunting 0.5 0.4% 37.0 0.4% Mining, Quarrying, and Oil and Gas Extraction 8.5 6.4% 235.7 2.4% Utilities 14.8 11.1% 318.5 3.2% Construction 1.7 1.3% 134.3 1.4% Manufacturing 29.1 22.0% 2,369.9 24.1% Wholesale Trade 12.8 9.7% 525.9 5.3% Retail Trade 11.0 8.3% 697.2 7.1% Transportation and Warehousing 6.5 4.9% 421.1 4.3% Information 20.2 15.3% 883.6 9.0% Finance and Insurance 5.4 4.1% 1,733.6 17.6% Real Estate and Rental and Leasing 7.6 5.7% 157.5 1.6% Services 14.1 10.7% 2,316.1 23.6% 

Professional, Scientific, and Technical Services 3.0 2.3% 453.3 4.6% Management of Companies and Enterprises 4.4 3.4% 1,001.3 10.2% Administrative and Support and  Waste Management and Remediation Services 1.3 1.0% 166.1 1.7% Educational Services 0.3 0.2% 22.8 0.2% Health Care and Social Assistance 1.9 1.4% 374.6 3.8% Arts, Entertainment, and Recreation 0.7 0.5% 41.4 0.4% Accommodation and Food Services 2.2 1.7% 201.1 2.0% Other Services 0.4 0.3% 55.6 0.6% 

Total 131.9 100.0% 9,830.6 100.0% Source: Office of Tax Analysis 
Appendix 1: Comparison of 100 Percent Bonus Depreciation to Small Business Expensing 

Allowing 100 percent bonus depreciation is economically equivalent to full expensing of 

depreciable asset purchases because it allows a complete write-off of the cost of qualified 

property in the year in which the property is placed in service. Nevertheless, there are several 

differences between the current 100 bonus depreciation proposal and the small business 

expensing provision that has been available for eligible investment since 1958.16

First, the small business expensing provision contains several limitations on its use that 

the bonus depreciation provision does not. As enacted in the Small Business Jobs Act of 2010 

(P.L. 111-240), enacted September 27, 2010, the small business expensing provision (applicable 

through 2011) begins to phase out for taxpayers having more than $2 million in annual eligible 

investment, and may be taken only up to $500,000 of eligible investment. The expensing 

deduction is limited further by the amount of income derived from the active conduct of a trade 

or business (i.e., the deduction cannot generate a net operating loss), although any unused 

expensing allowance thus limited may be carried forward indefinitely. Bonus depreciation, on 

the other hand, is not limited by the size of a taxpayer’s investments in qualified property. It also 

applies to all of the taxpayer’s qualified property, not only $500,000 of such. Furthermore, 

bonus depreciation deductions are not limited by taxable income. Instead, the bonus 

depreciation deduction can create or increase the size of a taxpayer’s net operating loss, which 

generally can be carried back for up to two years, and carried forward for up to twenty years. 

Thus, unlike small business expensing, the bonus depreciation deduction may immediately 

benefit a taxpayer with a current net operating loss, provided the taxpayer has sufficient positive 

taxable income in the two prior taxable years. 

Second, although the definition of eligible investment under small business expensing is 

similar to the definition of qualified property under the bonus depreciation provisions, 

differences do exist. The small business expensing provision enacted by the Small Business Jobs 

Act of 2010 allows expensing for certain restaurant buildings and for certain improvements to 

retail properties that are not qualified investments under bonus depreciation. However, small 

business expensing may not extend to certain real property (other than buildings) that qualifies 

under the bonus depreciation rules. Bonus depreciation, but not small business expensing, may 

apply to depreciable property used for the production of income, but not used in a trade or 

business. Also, bonus depreciation applies only to new property, while small businesses may 

expense newly purchased but previously used assets as well. 

Other differences between these provisions exist. For instance, small business expensing 

deductions are exempt from uniform capitalization requirements that generally apply to 

inventory-using and other asset-producing industries, while bonus depreciation allowances can 

                                                           

16 Under section 179 of the Internal Revenue Code, eligible investment (or “Section 179 property”) generally 

includes tangible depreciable property and certain purchased computer software. Section 179 property must be 

acquired by purchase for use in the active conduct of a trade or business. 
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be required to be capitalized into inventory costs or the costs of other assets produced by a 

taxpayer. The two provisions also differ in their treatment of automobiles and light trucks, with 

more generous rules for the amounts that can be expensed under bonus depreciation.17 Election 

and recapture rules also differ between the two provisions. 

 

                                                           

17 Depreciation allowances and the small business expensing deduction for automobiles and light trucks are subject 

to specified annual dollar limits. Under 50-percent bonus depreciation, however, the first-year limit is raised by 

$8,000 – a benefit not extended to small business expensing. The small business expensing provision also limits the 

expensing of large sport utility vehicles that are not otherwise subject to the annual deduction limits to $25,000 per 

vehicle. Bonus depreciation does not contain an equivalent limitation for sport utility vehicles. 
- 18 -

References 

Auerbach, Alan and Kevin Hassett (1992). “Tax Policy and Business Fixed Investment in the United 

States.” Journal of Public Economics, 47(2), 141-70. 

Billings, B.A., B. Musazi, and M. Houston (2008). “Bonus depreciation incentives may not work for 

needy firms,” Tax Notes 118, 735-737. 

Cohen, Darrel and Jason Cummins (2006). “A Retrospective Evaluation of the Effects of Temporary 

Partial Expensing,” Finance and Economics Discussion Series #2006-19, Divisions of Research 

and Statistics and Monetary Affairs, Federal Reserve Board, Washington D.C. 

Commerce Clearing House (2003). “CCH Tax Briefing: Corporate Income Tax and Bonus 

Depreciation,” Special Report, December 4, 2003. 

House, Christopher and Matthew Shapiro (2008). “Temporary Investment Tax Incentives: Theory with 

Evidence from Bonus Depreciation.” American Economic Review 98 No. 3 (June, 2008): 737-

768. 

Hulse, David S. and Jane R. Livingstone (2010). “Incentive Effects of Bonus Depreciation,” (January, 

2010). 

Huston, G. (2007). “The Implications of Increased Depreciation Allowances on Firms’ Capital 

Expenditures and Leasing Transactions.” Working paper, Florida State University. 

Knittel, Matthew (2007). “Corporate Response to Accelerated Tax Depreciation: Bonus Depreciation for 

Tax Years 2002-2004.” Office of Tax Analysis Working Paper 98, U.S. Department of the 

Treasury (May 2007).