Office of Tax Analysis 

Working Paper 110 

October 2016 

Business Use of Section 179 Expensing and 

Bonus Depreciation, 2002-2014 

John Kitchen and Matthew Knittel

The OTA Working Papers Series presents original research by the staff of the Office of 

Tax Analysis. These papers are intended to generate discussion and critical comment 

while informing and improving the quality of the analysis conducted by the Office. The 

papers are works in progress and subject to revision. Views and opinions expressed are 

those of the authors and do not necessarily represent official Treasury or Commonwealth of 

Pennsylvania positions or policy. Comments are welcome, as are suggestions for 

improvements, and should be directed to the authors. OTA Working Papers may be 

quoted without additional permission. 
BUSINESS USE OF SECTION 179 EXPENSING AND 

BONUS DEPRECIATION, 2002-2014 

October 2016 

John Kitchen1

 and Matthew Knittel2

This paper examines business use of special provisions for increased expensing of capital 

investment that have been passed into law over the past decade and a half -- bonus 

depreciation and expanded Section 179 expensing limits. Tax data over the 2002-2014 

period show that corporations, pass-through entities, and individual filers have tended to 

use Section 179 expensing in the 60 percent to 80 percent range, both in terms of the 

numbers of businesses claiming the deductions and for the deduction amounts claimed 

relative to total allowed investment amounts. For bonus depreciation, in the years 2002-

2004 and 2008-2014, the effective take-up rates were lower than observed for Section 

179 expensing. The number of firms using bonus depreciation for eligible investment 

generally was in the 40 percent to 60 percent range relative to the number eligible, while 

the bonus depreciation deduction relative to the eligible investment amount generally 

was in the 50 percent to 70 percent range for C corporations and S corporations, but was 

at lower ranges of about 40 percent to 60 percent for partnerships and 30 percent to 40 

percent for individuals. Total business use of Section 179 expensing and bonus 

depreciation over the 2002-2014 period averaged nearly $300 billion per year, and more 

recently over $400 billion per year for 2012-2014. Probit analysis of C corporation data 

from 2008 is consistent with theoretical priors that bonus depreciation use is limited by 

firms in a loss position, and by firms with net operating loss carryforwards. The analysis 

also is consistent with a positive relationship between bonus use and conformity of state 

tax laws with Federal treatment regarding bonus depreciation; average equipment 

investment life; the size of the firm; and for manufacturing and mining firms relative to 

other industries. 

Keywords: Business taxes, Expensing, Bonus Depreciation, Investment 

JEL Codes: H22, H25

 

1

 John Kitchen: Office of Tax Analysis, U.S. Department of the Treasury, John.Kitchen@treasury.gov. 

2

 Matthew Knittel: Independent Fiscal Office, Commonwealth of Pennsylvania, mknittel@ifo.state.pa.us. 
1 

1. INTRODUCTION

 Over the past decade and a half, special provisions for accelerated depreciation of 

equipment investment were passed and signed into law, with the stated policy intent of providing 

pro-growth incentives for increasing investment. The two main provisions for special accelerated 

depreciation have been: 1) “bonus” depreciation under Section 168(k) that allows for an 

additional first-year depreciation deduction; and 2) increases in Section 179 expensing limits, the 

maximum deduction allowed for full expensing of equipment investment by “small businesses.” 

By allowing firms to deduct capital expenditures more quickly, bonus depreciation and Section 

179 expensing reduce the cost of capital and lower the effective tax rate. 

 This paper provides a retrospective on the use of Section 179 expensing and bonus 

depreciation over the 2002-2014 period, including take-up rates -- the percentages of eligible 

firms and investment using the provision -- across organizational form (C corporations, S 

corporations, partnerships, and individuals3

) and across tax years.4 We review existing studies 

regarding the evidence on whether the special expensing provisions led to increases in investment 

above levels that would have otherwise occurred -- i.e. a policy-induced behavioral response -- 

but do not provide any new evidence on that issue. Rather, the focus is on the overall utilization 

of Section 179 expensing and bonus depreciation for the given investment observed, and the 

characteristics of firms that appear to underlie the decision to use or not use bonus depreciation. 

Using IRS Statistics of Income (SOI) tax data, we find that take-up rates were relatively high for 

Section 179 expensing (for allowed investment given income tests) -- generally in the 70 percent 

to 80 percent range for C corporations and S corporations, and somewhat lower at around 60 

percent to 70 percent for partnerships and individuals. For bonus depreciation, the take-up rates 

relative to eligible investment generally were in the 50 percent to 60 percent range for C 

corporations and S corporations, in the 40 percent to 60 percent range for partnerships, and in the 

30 percent to 40 percent range for individuals. In dollar volume, use of Section 179 expensing 

has varied over the years as the legislative limits and the performance of the economy have 

varied; aggregate use of Section 179 expensing across all legal forms averaged just over $50 

billion per year over 2003-2011, and just over $80 billion in the more recent years of 2012-2014. 

Regarding the use of bonus depreciation, during years when 50 percent bonus was in place, the 

total use across legal forms ranged from about $210 billion (average for 2004, 2008-2009) to 

about $345 billion (average 2012-2014). The peak use for bonus depreciation was for 2011 when 

 

3

 The reference to “individuals” is often synonymous with “sole proprietors” but our analysis also includes 

farm and rental filers. 

4

 This paper updates and expands upon earlier work in Knittel (2005), Knittel (2007) and Kitchen and 

Knittel (2011). 
2 

100 percent bonus depreciation was in place and the total bonus amount claimed was $548 

billion. 

 We also present empirical analysis examining the role of various factors that affect the 

estimated probability of a firm using bonus depreciation. While we cannot precisely identify the 

factors that determine the take-up rates for bonus depreciation, the analysis and empirical 

evidence we present are consistent with the use of bonus depreciation being reduced by the firm 

being in a loss position or using net operating loss carryforwards and thus being unable to fully 

realize the tax benefits of immediate expensing. The results are also loosely consistent with 

bonus use being lower because of the lack of conformity of state tax laws with Federal treatment 

regarding bonus depreciation. The results also indicate bonus use is higher for firms with longerlived equipment investment, for larger firms, and for mining and manufacturing firms. 

 The paper proceeds as follows. Section 2 presents background and recent historical 

information on Section 179 and bonus depreciation provisions and legislation. Section 3 presents 

information on the economics of accelerated depreciation, with examples that illustrate the 

beneficial effects in terms of the present value of deductions, the cost of capital, and the effective 

tax rate. Section 4 provides the policy perspective and a brief review of the literature on 

empirical evidence on the investment responses to bonus depreciation provisions. Section 5 

discusses the data used and the adjustments, imputations, and other calculations that are made. 

Section 6 presents the results from the tax data for use of Section 179 and bonus depreciation by 

organizational form and by year. Section 7 presents empirical results for probit estimation for the 

probability of firm use of bonus depreciation based on various characteristics, as well as some 

representative examples. Section 8 considers some special issues, including the distribution by 

income and by industry for the use of Section 179 and bonus depreciation, and the challenge of 

properly accounting for “used” property in making the estimates. Section 9 presents the summary 

and conclusions. Appendixes are included that provide the IRS Form 4562 for Depreciation and 

Amortization; charts for the legislative history for Section 179 and bonus depreciation; and a 

description of the derivation of the investment basis amounts for Section 179 and bonus used in 

the paper. 

2. SECTION 179 EXPENSING AND BONUS DEPRECIATION LEGISLATION

 Over the years, numerous laws have been passed instituting specific provisions in the tax 

code to allow for immediate expensing of investment; notably, over the past decade and a half, 

the special depreciation allowance -- also known as “bonus depreciation” -- has allowed for 

partial or full expensing of equipment and software investment for various years, and higher 
3 

Section 179 expensing limits and phase-out ranges have allowed for greater investment expensing 

by businesses with investment amounts below established limits.5

 This section presents some 

historical and background discussion for the bonus depreciation and Section 179 expensing 

provisions. 

2.1 Section 179 expensing 

 Section 179 expensing was added to the tax code with the enactment of the Economic 

Recovery and Tax Act of 1981 and the Accelerated Cost Recovery System rules.6

 Under Section 

179, taxpayers may elect to expense qualifying investment up to a specified limit. Qualifying 

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

active conduct of a trade or business.7

 In general, this definition includes equipment that would 

normally be depreciated under the Modified Accelerated Cost Recovery System (MACRS) for 

property with a tax life of 3, 5, 7, 10, 15, or 20 years. For tax years that began in 2002, the 

maximum Section 179 deduction was $24,000; the deduction was phased-out dollar-for-dollar if 

qualified investment exceeded $200,000. The Jobs and Growth Tax Relief Reconciliation Act 

(JGTRRA) of 2003 increased the maximum deduction to $100,000 and the phase-out level to 

$400,000 for tax years that began in 2003 and, including an extension under the American Jobs 

Creation Act (AJCA) of 2004, those limits continued, adjusted for inflation, through 2007. The 

Small Business and Work Opportunity Act of 2007 (passed with the Defense Supplemental of 

2007) raised the limits to $125,000/$500,000 for 2007; the Economic Stimulus Act (ESA) of 

2008 and the American Recovery and Reinvestment Act (ARRA) of 2009 set the limits at 

$250,000/$800,000 for 2008 and 2009; the Small Business Jobs Act (SBJA) of 2010 set the limits 

at $500,000/$2,000,000 for 2010 and 2011; the American Taxpayer Relief Act (ATRA) of 2012 

extended the $500,000/$2,000,000 levels through 2012-2013; the Tax Increase Prevention Act 

(TIPA) of 2014 extended those levels through 2014; and the Protecting Americans from Tax 

Hikes (PATH) Act of 2015 made permanent the maximum deduction at $500,000 and the phaseout threshold at $2,000,000 -- with those levels indexed for inflation for years after 2015. 

 In addition to the qualifying investment limit, the Section 179 deduction is also limited 

by a taxpayer’s taxable income. The deduction may not exceed the sum of taxable income 

 

5

 See Appendix B for a detailed legislative timeline. 

6

 For a succinct description of the background regarding depreciation and Section 179 expensing as of 

2005, also see Joint Committee on Taxation (2005); and for a more recent description also see Gunther 

(2015). 

7

 This includes off-the-shelf computer software placed in service in taxable years beginning after 2003. 

Alternatively, these purchases would not qualify for Section 179 expensing and would be amortized over 

three years. 
4 

derived from the active conduct of a business (or businesses) plus any wage or salary income. 

The income limit applies separately to the individual taxpayer and each business entity. Many 

individuals receive multiple Section 179 deductions because they have more than one sole 

proprietorship and/or they receive Section 179 deductions that are passed through from 

partnerships or S corporations. (The pass-through of Section 179 deductions to specific 

partners/shareholders is unique; all other depreciation allowances are included in the computation 

of business net income and apportioned among partners/shareholders.) Regardless of how many 

deductions a single taxpayer receives from a sole proprietorship, farm, or pass-through entity, the 

taxpayer’s total deduction may not exceed the lesser of the maximum deduction or the taxable 

income limit. Amounts disallowed by the income limitation are carried forward to future tax 

years. The deduction for carryforwards plus any current year amounts expensed under Section 

179 may not exceed the maximum deduction limit or, if lesser, the taxable income limit. In this 

manner, carryforward deductions that are generated via Section 179 are always subject to the 

maximum deduction and taxable income limits. Conversely, “regular” depreciation deductions 

are not subject to such limits. 

 Although most equipment -- including “used” equipment as long as it is new to the 

taxpayer -- qualifies for Section 179, certain listed property does not. Listed property is property 

that lends itself to personal use such as passenger automobiles, property used for transportation, 

computers and related peripheral equipment (unless used solely at a regular business 

establishment), and property generally used for entertainment, recreation, or amusement. 

Taxpayers must apportion listed property between business and personal use and claim 

deductions attributable to the business share only (if greater than 50 percent). In addition, further 

complications arise for expensing and depreciation treatment for passenger automobiles (listed 

property) and heavy Sport Utility Vehicles (SUVs). The depreciation deduction for passenger 

automobiles (those rated at 6,000 pounds gross vehicle weight or less) is limited and dependent 

on the use or non-use of bonus depreciation; for example, the maximum depreciation deduction 

for the first year for a passenger automobile placed in service in 2013 was $11,160 if electing to 

use bonus depreciation, but only $3,160 if not electing to use bonus depreciation. For heavy 

SUVs -- “any 4-wheeled vehicle primarily designed or used to carry passengers ... that is rated at 

more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle 

weight” -- the taxpayer cannot elect to expense more than $25,000 of the cost of the vehicle. As a 

result of these varying depreciation deduction limits under alternative expensing and depreciation 

treatments, taxpayers can face varying incentives regarding the choices to use Section 179 

expensing or bonus depreciation.
5 

2.2 Bonus depreciation

 In the wake of the September 11 attacks and the recession of 2001, the Job Creation and 

Worker Assistance Act of 2002 put in place in Section 168(k) of the Internal Revenue Code an 

additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified 

property (30 percent “bonus” depreciation) for property placed in service on or after September 

11, 2001. The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003 increased the 

bonus depreciation percentage to 50 percent, for investment made after May 5, 2003 and before 

January 1, 2005. Following its expiration at the end of 2004, bonus depreciation was not in place 

during 2005-2007 -- the middle-to-latter years of that economic expansion. In 2008, 50 percent 

bonus depreciation was reinstated by the Economic Stabilization Act (ESA) of 2008, and the 

American Recovery and Reinvestment Act (ARRA) of 2009 extended it through 2009. The 

Small Business Jobs Act (SBJA) of 2010 initially extended 50 percent bonus depreciation 

through 2010, but full 100 percent expensing was put in place for the period September 9, 2010 

through December 31, 2011 by the Tax Relief and Unemployment Insurance Reauthorization and 

Job Creation Act (TRUIRJCA) of 2010. Bonus depreciation at 50 percent was extended through 

2012 by TRUIRJCA, through 2013 by the American Tax Relief Act (ATRA) of 2012, and 

through 2014 by the Tax Increase Prevention Act (TIPA) of 2014. The Protecting Americans 

from Tax Hikes (PATH) Act of 2015 extended 50 percent bonus depreciation for the years 2015 

through 2017, and then a partial phase-down to 40 percent bonus depreciation for 2018 and 30 

percent bonus depreciation for 2019. Qualified property for bonus depreciation is generally new 

equipment and prepackaged software (see Appendix C for more specific information on qualified 

property). 

 Taxpayers may claim bonus depreciation if they have eligible investment and, unlike 

Section 179 expensing, there are no investment or income limits. Eligible investment is 

investment to which the general rules of the MACRS apply and have a class life of 20 years or 

less.8

 Original use must commence with the taxpayer claiming the deduction; used equipment 

purchases do not qualify for bonus depreciation. 

 In addition to the general provisions for bonus depreciation, a variety of special cases for 

bonus depreciation treatment have been put in place in various years and periods over the past 

decade -- notably for New York Liberty Zone property, Gulf Opportunity Zone property, 

 

8

 Eligible investment also includes water utility property, computer software (other than software covered 

by Section 197), qualified leasehold improvement property, and certain aircraft. Property required to be 

depreciated under the Alternative Depreciation System (ADS), notably tangible property used 

predominantly outside the United States, is not eligible for bonus depreciation. 
6 

cellulosic and biomass fuel plant property, reuse and recycling property, and disaster assistance 

property.9

 

3. ECONOMICS OF ACCELERATED DEPRECIATION

 Before presenting and examining results from reported tax data, it is informative to 

examine how accelerated tax depreciation affects a firm’s marginal effective tax rate and 

investment decision. 

3.1 The mechanics of bonus depreciation 

 To illustrate the impact of bonus depreciation, Table 1 lists the “regular” tax law 

(MACRS) and temporary 50 percent bonus depreciation schedules for the six classes of eligible 

investment. A simple example demonstrates how bonus depreciation works. Assume that a firm 

invests $100 in equipment that has a tax life of five years. Usually, under MACRS the 

depreciation deduction would be $20 for the first year. If the investment qualifies for the 50 

percent bonus allowance, then the firm can write-off or deduct 50 percent of the investment in the 

first year (i.e., $50), and then depreciate the remaining amount using the regular depreciation 

schedule. In this example, the firm would claim $50 in bonus depreciation plus another $10 of 

regular depreciation (($100 - $50) times 20 percent), for a total deduction equal to $60 in the first 

 

9

 Our review of the data indicates these amounts are generally small in aggregate compared to the general 

bonus depreciation amounts. Because the amounts for these special provisions are reported the same way 

as general bonus (on line 14 of Form 4562), they are included in the estimates we present below. 
7 

year. This is shown in the second line of the bottom section of Table 1. Note that the reported 

bonus deduction does not represent the net additional deduction claimed by the firm in the year 

the investment is made ($40 in this example); the incremental deduction attributable to the bonus 

provision is somewhat less than the bonus deduction itself. 

3.2 The user cost of capital and effective tax rates 

 Bonus depreciation reduces the effective tax rate on investment because it increases the 

net present value of the depreciation allowance. The first set of columns in Table 2 show the net 

present value of deductions for regular MACRS depreciation and for the 50 percent bonus 

depreciation schedules under an assumption of a 5 percent discount rate. Bonus depreciation can 

substantially accelerate deductions, especially for longer-lived property. Compared to regular 

tax depreciation, 50 percent bonus depreciation increases the net present value of deductions by 

25 percent for twenty-year property. Conversely, for three-year property, 50 percent bonus 

depreciation adds little to net present values: about 2percent.

 Although present value comparisons are straightforward and can be informative, they do 

not provide a comprehensive measure of the impact that accelerated tax depreciation has on 

investment incentives. A more complete measure is a firm’s marginal effective tax rate which is 

a derivative of the cost of capital as first developed by Hall and Jorgensen (1967). The cost of 

capital is the pre-tax rate of return on a barely profitable investment that covers the investment’s 

tax cost while still leaving the investor his or her required after-tax rate of return. The cost of 

capital represents the pre-tax return on the final or marginal investment; firms should undertake 

additional investment as long as the (net of depreciation) marginal product of capital exceeds the 

cost of capital. 

 Following Hall and Jorgenson (1967) and a typical approach considered in the literature, 

a simplified representation of the cost of capital (for one dollar of investment) is given by (in this 

case for a corporation and net of economic depreciation): 

ሺ1ሻ													ܿ		 ൌ 		 ሺ	ݎ	 ൅ ߜሻ ൬

ݖ߬	 െ 1

1 െ 	߬ ൰ െ 	ߜ		

where r is the real discount rate, δ is the rate of economic depreciation, τ is the statutory corporate 

tax rate, and z is the present discounted value of allowances for tax depreciation deductions (for 
8 

one dollar of investment).10 The second parenthetical term on the right-hand side (1 - τz)/(1 - τ) 

illustrates the role of tax depreciation deductions and the corporate tax rate; for given nominal 

interest rates, expected inflation, economic depreciation rates, and statutory tax rates, the user 

cost of capital rises or falls as the present discounted value of allowances for tax depreciation 

rises or falls. As long as the present discounted value of tax depreciation deductions is less than 

one, that term will be greater than one. Accelerated depreciation -- increasing z closer to 1 -- in 

general reduces the user cost of capital; special provisions for immediate expensing -- z equal to 1 

-- would minimize the user cost ceteris paribus and eliminate the role of taxes in determining the 

user cost in the relevant range for expensing. 

 Table 2 depicts the impact of bonus depreciation on firms’ cost of capital for the six 

classes of eligible investment. The computations assume that investments are held forever and 

two-fifths of investment is financed by debt, the remainder with equity which is split between 

retained earnings and new share issues. (In equation (1), the method of financing affects r and is 

not explicitly visible.) The computations assume that the required real return to investment is 

equal to 3.5 percent. The computations also include the effects of taxes at the investor level: we 

set individual/investor level tax rates at 20 percent for capital gains and dividends and 30 percent 

for interest income. 

 Using these assumptions, the marginal effective tax rate is then equal to the difference 

between the cost of capital (c) and the required return on investment (r) divided by the cost of 

capital or (c – r) / c. The marginal effective tax rate is the tax rate that, if levied on economic 

income, would be equivalent in its incentive effects to the various features of the tax code 

modeled in the cost of capital formula, such as depreciation, statutory tax rates at the entity and 

 

10 We note this simple cost of capital representation is based on various assumptions, including that firms 

have sufficient tax liability to utilize deductions; firms do not resell assets; it ignores state and local taxes; 

and it ignores debt finance and individual level taxes. 
9 

investor levels and indexing provisions. If the tax system measured and taxed economic income, 

then the marginal effective tax rate on investment would equal the statutory tax rate. 

3.3 Cash flow benefit of bonus depreciation 

 Marginal effective tax rates are useful when considering the firm’s investment decision, 

but they do not provide insight regarding bonus depreciation’s cash flow benefit to a firm. Table 

3 shows the maximum potential benefit to firms who claim bonus depreciation for a $1 million 

investment. The computed cash flow benefit is simply the net present value of the change in tax 

liability over the tax life of the investment.11 For example, bonus depreciation on a $1 million 

investment in five-year property would reduce tax liability by $140,000 in the year of investment: 

$600,000 times 35 percent less $200,000 times 35 percent. Bonus depreciation then increases tax 

liability by $56,000 in the second year, $33,600 in the third year, $20,160 in the fourth and fifth 

years and $10,080 in the sixth year (a net differential of zero if we ignore present value). The net 

present value of this change in tax liability over the investment’s tax life -- $14,292 in the second 

row first column of Table 3 -- shows the firm’s cash flow benefit from delaying tax payments. 

For three-year property, the computed cash flow benefit is more modest at $7,879. The cash flow 

benefit more than doubles to $20,237 for seven-year property. For twenty-year property, the cash 

flow benefit is significant at $58,339 because bonus depreciation pulls deductions forward from 

tax years many years in the future. It should be noted that the cash flow benefit appears much 

larger for longer-lived property largely due to the asset’s longer tax life for a given outlay. 

 These simple cash flow computations as shown in the “immediate use” column of Table 

3 assume that firms have sufficient taxable income to make full use of all accelerated deductions 

in the first year of bonus depreciation. However, this assumption does not hold for many firms. 

For example, loss firms cannot immediately use the accelerated deduction to offset taxable 

income and must instead carry the loss forward to offset taxable income in a future year. 

Alternatively, firms with stocks of unused credits or loss carryforwards may receive less benefit 

from bonus depreciation if the accelerated deduction merely displaces a credit or loss 

carryforward that would have been claimed in its absence. For carryforward firms and firms that 

generate new tax credits, it is possible that bonus depreciation has little or no impact on the 

stream of tax liability reported by the firm. 

 Table 3 lists the cash flow benefit if the additional bonus depreciation allowances cannot 

be used to offset taxable income for one or two tax years. This delay may effectively occur if the 

 

11 For purposes of illustration in these examples, we use the statutory corporate tax rate as the relevant tax 

rate. 
10 

firm reports a tax loss or if the firm has loss carryforwards or credits that could be used to offset 

taxable income. For three-year property, a one-year delay reduces the cash flow benefit by 70 

percent; a two-year delay reduces the benefit by 90 percent. For five-year and seven-year 

property, a one-year delay reduces the cash flow benefit by about 35 to 45 percent; a two-year 

delay by about 60 to 70 percent. For fifteen- and twenty-year property, a one-year delay reduces 

the cash flow benefit by only 14 to 17 percent; a two-year delay by 26 to 32 percent. 

4. THE POLICY PERSPECTIVE AND EVIDENCE IN THE LITERATURE

 The continued use and expansion of small business expensing and bonus depreciation 

suggest that policymakers believe such policies have value for certain firms -- and for the 

economy in general. Even so, various factors can limit the value and use for firms from greater 

expensing of investment, and the evidence is mixed regarding the extent to which such policies 

promote increased investment. 
11 

4.1 Perceived benefits ... and possible limitations and costs? 

 The Ways and Means Committee -- in its committee report for the Jobs and Growth Tax 

Relief Reconciliation Act of 2003 -- cited the perceived investment and economic benefits from 

expanded Section 179 expensing and from bonus depreciation. For Section 179 expensing: 

The Committee believes that section 179 expensing provides two important benefits for 

small businesses. First, it lowers the cost of capital for tangible property used in a trade 

or business. With a lower cost of capital, the Committee believes small business will 

invest in more equipment and employ more workers. Second, it eliminates depreciation 

recordkeeping requirements with respect to expensed property. In order to increase the 

value of these benefits and to increase the number of taxpayers eligible, the Committee 

bill increases the amount allowed to be expensed under section 179 and increases the 

amount of the phase-out threshold, as well as indexing these amounts. (Committee on 

Ways and Means (2003), p. 25) 

Similarly, for bonus depreciation: 

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. (Committee on Ways and Means (2003), p. 23) 

 Related to our earlier discussion above, Cohen, Hansen and Hassett (2002) showed that 

“By reducing the user cost for equipment and software, partial expensing provides the incentives 

to stimulate current investment, an impact that is likely to be strengthened by the temporary 

nature of the provision.” Auerbach (2009) identified benefits -- but also some limitations -- for 

bonus depreciation: 

Bonus depreciation increases the incentive to invest by increasing the present value of 

depreciation deductions. It might have an advantage over other investment incentives 

that do not affect the timing of tax payments if private discount rates substantially exceed 

the government’s discount rate, as might be especially true at the moment. But the key to 

any scheme of accelerated depreciation is the acceleration, since there is no net increase 

in the nominal deductions taken over time. Thus, for firms without taxable income that 

may become taxable only years later, bonus depreciation is of little value. This may be a 

more important issue now than in earlier decades, given the sharp and as yet not fully 

understood surge in losses observed earlier in this decade. 

Steuerle (2008) further addresses the challenges associated with using bonus depreciation during 

periods of slower economic performance, and especially as an investment incentive: 
12 

What types of businesses can actually use this type of allowance? Those that already 

have a lot of profits. ... Many businesses -- both those that are new and those that are 

going through rough times -- can’t take advantage of such a generous tax break. 

Interestingly, it is during an economic slowdown or recession that businesses hardest hit 

will be the ones put at a further disadvantage: They will be relatively less likely than 

other firms to be able to take advantage of extraordinary write-offs. ... Even if one wants 

temporary investment incentives, bonus depreciation is an anti-competitive way to 

provide them. 

 Additional complications regarding the use and incentives from bonus depreciation have 

been identified, notably from states decoupling from Federal tax code for purposes of determining 

depreciation deductions: 

The pressure on states to decouple from federal efforts to stimulate the economy is not a 

new development. The Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 

107-147)—enacted during a recession—provided an additional first-year depreciation to 

encourage investment. Ultimately, about 30 states decoupled from the provision. States 

have since decoupled from various other provisions—including bonus depreciation 

provisions that apply to the 2008 and 2009 tax years, federal net operating loss 

provisions, and federal treatment of cancellation of indebtedness income. (Gregory and 

Roll (2010)) 

 To the extent that firms choose to simplify their tax accounting and reporting, the 

decoupling of state tax treatment from Federal bonus depreciation would raise additional tax 

accounting costs and burdens that could limit the use and potential benefits from bonus 

depreciation. 

4.2 Research and evidence on induced investment responses 

 Although we do not provide any new direct evidence in this paper on the responsiveness 

or inducement of investment to Section 179 expensing or bonus depreciation, the information on 

the firm use/take-up of those provisions has direct bearing on the question of whether the 

provisions act as significant incentives for investment. In their review of literature regarding the 

empirical evidence on the effectiveness of investment incentives, Hungerford and Gravelle (2010) 

properly put the issue in the context of the question of whether investment is responsive to 

changes in the “price” of capital. Hassett and Hubbard (2002) provided a review of the empirical 

literature at that time, stating “Many observers even recently (e.g., Clark (1993)) have argued that 

tax policy likely does not significantly affect investment.” Indeed, empirical estimates of the 

responsiveness of investment to changes in the user cost indicate an inelastic response; Cummins, 

Hassett and Hubbard (1994) estimated the elasticity of aggregate investment with respect to the 

user cost of capital at about -0.66, while Chirinko, Fazzari, and Meyer (1999) found that their 
13 

micro-dataset-based estimates “lead us to prefer a precisely estimated but small elasticity of 

approximately -0.25.” Lee and Rabanal (2010) found that in estimation of investment equations 

for forecasting purposes, the use of a tax-adjusted measure for the user cost of capital was inferior 

to an unadjusted measure of the user cost of capital. Such inelastic investment responses to 

changes in the price of capital -- and unreliable estimation results for empirical purposes -- would 

seem therefore to make it less likely, or more difficult to identify, that bonus depreciation or other 

accelerated depreciation provisions have a significant incentive effect on investment. 

 The evidence from recent studies that specifically addressed the role of bonus 

depreciation as an investment incentive is mixed, at best. Desai and Goolsbee (2004) found only 

a small response of investment to the initial implementation of bonus depreciation, stating: 

“Changes to depreciation allowances simply do not have much impact when the system is already 

so close to full expensing and when aggregate declines in market value (and therefore in q) are so 

large.” Cohen and Cummins (2006) observed empirical evidence that “suggests only a very 

limited impact of partial expensing on investment spending, if any.” Cohen and Cummins also 

cited several surveys of businesses indicating that “partial expensing affected investment 

decisions of very few respondents.” House and Shapiro (2008), in contrast to many other studies, 

observed significant investment effects from bonus depreciation such that “Capital that benefitted 

substantially from the policy saw sharp increases in investment,” in which the investment 

response was higher for longer-lived equipment relative to shorter-lived equipment, and for 

bonus-eligible investment goods relative to non-eligible investment goods. Interestingly, Huston 

(2006) found evidence that “firms made changes to their investment patterns, significantly 

increasing purchases of advantaged assets ... [but] also significantly decreased non-advantaged 

asset purchases, leading to only a marginal overall increase in capital expenditures.” Auerbach 

and Hassett (2009) provide a review of evidence and accept the view that “the partial expensing 

provision would have a small and positive effect on investment.” 

 Hulse and Livingstone (2010) found mixed evidence with some results indicating that 

bonus depreciation led to higher capital expenditures during its availability, while other results 

suggested an insignificant effect. Edgerton (2011a) observed that because firms place greater 

weight on accounting treatment and profits, accelerated depreciation would be less effective in 

stimulating business investment; similarly, Hanlon (2012) argued that financial accounting effects 

can strongly influence the incentives of tax policy for investment and notably that, “companies 

respond less than predicted to bonus depreciation partly because the tax savings are not reflected 
14 

on a firm’s accounting income statement.”12 Edgerton (2010) examined asymmetries between 

taxable and nontaxable firms and finds results suggesting “that tax incentives have the smallest 

impact on investment exactly when they are most likely to be put in place -- during downturns in 

economic activity when cash flows are low.” Edgerton (2011b) examined prices of used 

equipment (which is not eligible for bonus depreciation and the price should be held down 

relative to the price of new equipment which is eligible for bonus) and finds that “There is no 

evidence ... that recent bonus depreciation investment incentives had any effect on the relative 

price of used construction machinery.” 

 More recently, Zwick and Mahon (2014, 2016) examined the use of bonus depreciation 

in more detail. Zwick and Mahon (2016) found that “bonus depreciation raised investment in 

eligible capital relative to ineligible capital by 10.4% between 2001 and 2004 and 16.9% between 

2008 and 2010. Second, small firms respond 95% more than big firms. Third, firms respond 

strongly when the policy generates immediate cash flows but not when cash flows only come in 

the future.” They also observe that the results support “models in which financial frictions or 

fixed costs amplify investment responses.” 

 Hence, on the whole, empirical results are mixed regarding the extent to which bonus 

depreciation provisions have a significant incentive effect for investment. Nonetheless, beyond 

any investment incentive effects and other relationships, Section 179 expensing and bonus 

depreciation can also have important cash flow effects for businesses. We turn next to the 

presentation of information and data regarding the observed use of Section 179 expensing and 

bonus depreciation. 

5. IRS TAX DATA AND DERIVING INVESTMENT BASIS

 The data used for this analysis are from the Internal Revenue Service’s (IRS) SOI income 

tax files for tax years 2002 through 2014.13 The data files for each year are stratified samples of 

returns for the tax year, weighted to represent national totals. For individuals, the tax year 

coincides with the calendar year; for corporations, tax year t includes firms with tax years that 

end in July of year t through June of year t+1.

 

12 See also Neubig (2006). 

13 The data for corporations used in this paper are “advance” tax year 2014 data; final data for 2014 were 

not yet available when the numbers were produced for this paper. 
15 

5.1 IRS Form 4562: Depreciation and Amortization 

 Much of the data of interest for this analysis is drawn from the reported amounts from 

IRS Form 4562: Depreciation and Amortization – which is presented in Appendix A. Firms 

report detailed information on investment basis and depreciation amounts on Form 4562, 

including a worksheet calculation for determining the investment amounts and income limitations 

for Section 179; the “special depreciation allowance” (bonus depreciation); and the investment 

basis and depreciation amounts for property depreciated under MACRS and other methods. 

5.2 Deriving investment basis for Section 179 and bonus 

 The calculation of the investment basis amounts for Section 179 and bonus depreciation 

deductions closely follows from the data for Form 4562.14 However, because there is not an 

exact alignment of the Form 4562 data with statutory definitions of qualified eligible property, 

and also because of the Section 179 investment limits, special accounting and imputations must 

be made. For both Section 179 and bonus depreciation, property depreciated under MACRS with 

a recovery period of 20 years or less is generally eligible property. For bonus depreciation, only 

new property is eligible, while for Section 179 used property (new to the owner) is also eligible. 

In examining the detailed data, we observed several special cases and likely incorrect reporting 

for which we had to make special accounting: notably imputing a basis amount from the reported 

deduction when deductions are shown for a given asset life but no basis is reported; imputing 

basis to properly reflect the amount of a reported bonus depreciation deduction when there is an 

obviously underreported basis amount; and in some cases we simply had to eliminate firms when 

the data reported were obviously incorrect and we were unable to make reasonable imputations. 

 Because Section 179 deductions are targeted toward small businesses and are therefore 

limited by law, they are capped by a “dollar limitation” and a “reduction in limitation” (a phaseout once investment reaches and exceeds certain levels). The tables that follow show the dollar 

limitation and the phase-out level; Appendix B shows the legislative history for these limits. The 

calculation of the investment basis amounts for the case of Section 179 deductions therefore 

begins by capping the Section 179 deduction amount at the maximum permitted under the general 

Section 179 limits. The calculated eligible property basis for Section 179 is the sum of the 

capped Section 179 deduction, reported bonus depreciation, the reported basis amounts for 3-, 5-, 

7-, 10-, 15-, and 20-year property, and an imputed software investment basis. In addition to the 

investment limit and phase-out, Section 179 deductions are subject to a business income limit -- 

 

14 For a detailed description of the methods we used to calculate the relevant investment basis that is 

eligible for bonus depreciation or Section 179, the reader is referred to Appendix C. We provide only a 

summary here in the text. 
16 

as IRS Publication 946 states: “limited to the taxable income from the active conduct of any trade 

or business during the year.” Disallowed deduction amounts resulting from the income limitation 

can be carried over to subsequent years. Using reported income variables by reporter, we 

calculated the amount of eligible basis under the business income limit to determine the amount 

of “allowed” basis for Section 179 deductions in the current year. 

 The calculation for the eligible basis for bonus was similar to that described above for the 

eligible property basis for Section 179 -- the sum of the MACRS basis amounts, imputed software 

basis, and reported bonus depreciation -- but the Section 179 deduction amount and any Section 

179 carryover amounts are not included in the calculation. Another notable difference is that only 

“new” property and not “used” property, is eligible for bonus depreciation. To account for used 

investment, we reduced the calculated basis by 6 percent based on evidence from the Annual 

Capital Expenditures Survey (ACES). 

6. BUSINESS USE OF SECTION 179 EXPENSING AND BONUS DEPRECIATION: THE DATA

 Tables 4, 5, 6 and 7 present annual data on key variables for the years 2002-2014 across 

the various legal forms: C corporations, S corporations, partnerships, and individuals. The data 

in the table are presented from the perspectives of both the numbers of firms and the dollar 

amount of investment. The data presentation takes a top down approach, starting from the 

broadest measure and working down to the narrowly-defined Section 179 and bonus firms and 

investment amounts. In the bottom of each table, for convenience of reference the last three lines 

show by year the Section 179 investment limitation, the Section 179 full phase-out level, and the 

bonus depreciation percentage. 

 Table 4 provides the data for C corporations. The top line shows that the total number of 

filers was generally around two million firms from 2002 to 2006, with that number trailing off to 

just over 1.6 million by 2012-2014. These results reflect the ongoing trend toward fewer 

businesses incorporated as C corporations. The numbers of C corporations with eligible Section 

179 basis and with bonus basis declined across the sample period absolutely, and also relative to 

the total number of firms: the number claiming the Section 179 deduction fell from 369,935 in 

2002 to 244,217 in 2014, and the number claiming bonus depreciation fell from 346,468 in 2002 

to 131,575 in 2014. For the Section 179 take-up percentages, only about 40 to 50 percent of 

firms with eligible investment used Section 179 expensing. However, that does not account for 

the income limitation that requires sufficient business income to use the Section 179 expensing 

deduction. Accounting for the income limitation, the take-up percentage for the number of firms 

with “allowed” Section 179 investment was generally around 80 percent. For bonus depreciation, 
17 

usually less than half of corporations with eligible investment basis actually used bonus 

depreciation, with the rate varying from 41 percent to 52 percent. It is notable that the highest 

take-up rate at 52 percent was in 2011, the year of 100 percent bonus depreciation. Analogous 

results are shown in the bottom half of the table for the dollar amounts of investment. The 

Section 179 take-up rates were generally in the 70 to 80 percent range relative to allowed Section 

179 basis amounts; the bonus take-up percentages were in the 53 to 59 percent range for 2001-

2004 but were more varied over the 2008-2014 period, ranging from 47 percent in 2008 to 75 

percent in 2012. The data show higher use of bonus depreciation relative to eligible investment 

in the later years, averaging near 70 percent across 2011-2014. 

 Notable exceptions for the general patterns for the take-up rates for Section 179 

expensing and bonus depreciation occurred for the tax year 2011 when 100 percent bonus 

depreciation was in place; in that year, the take-up percentages for the number of firms using 

Section 179 expensing were at markedly lower levels than for other years (e.g., for C corporations 

at 69 percent compared to the more-typical take-up rates near 80 percent) – and the percentage of 

firms using bonus was higher as noted above. The number of C corporations using Section 179 

expensing in 2011 was about 40,000 lower than the average for surrounding years, while the 

number using bonus depreciation was about 40,000 higher. These results suggest, at least at some 

margin, a fungible choice in the 2011 tax year between claiming Section 179 expensing and (full) 

100 percent bonus expensing; given that either provision would yield full expensing, some 

businesses perhaps viewed it as a simplification to use bonus depreciation, rather than Section 

179 expensing with its reporting and calculation requirements for the associated limits, phaseouts and income tests. 

 An additional observation regarding the bonus depreciation amounts and investment are 

(1) the large increase in eligible bonus basis from 2011 to 2012 (a 15.7 percent increase) and (2) 

the peaking of the bonus take-up rate in 2012 (for the dollar amount); these occurred despite the 

fall from 100 percent bonus in 2011 to 50 percent bonus in 2012. From the perspective of bonus 

depreciation creating incentives for boosting investment, then, if anything, one would tend to 

think the temporary full expensing (100 percent) in late 2010 through 2011 should have pulled 

investment forward out of 2012. Looking ahead to the NIPA data in Table 8, we see there also 

was a corresponding jump in the NIPA data for investment in 2012, but somewhat less strong at 

12 percent. These outcomes are contrary to an expectation that the retreat from 100 percent 

expensing to 50 percent expensing would result in somewhat weaker investment in 2012 relative 

to otherwise, and particularly in the first quarter of 2012; but the NIPA investment data do not 
18 

show that, and in 2012:Q1 the growth rate for NIPA equipment investment was a strong 18 

percent.15 

 Table 5 provides the analogous comparisons for bonus depreciation and Section 179 

expensing use for S corporations. In contrast to the decline for the total number of C corporations 

over time observed in Table 1, the number of S corporations rose steadily over the period shown, 

from 3.15 million in 2002 to 4.38 million in 2014 (top line of Table 5). The number of S 

corporations claiming the Section 179 expensing deduction rose from 724,164 in 2002 to over 

900,000 for 2005 to 2007, but then fell to 736,438 in 2009 during the recession, and then rose 

again to over 870,000 for 2012-2013 and 945,898 in 2014. The Section 179 take-up percentage – 

both for the number of firms with allowed investment and for the dollar amount of investment – 

generally persisted around 75 percent to 80 percent. Regarding bonus depreciation use, 

progressively fewer S corporations used bonus depreciation over the period 2002-2004 and the 

number using bonus depreciation over the 2008-2014 (aside from 2011) period tended to run at 

around 400,000 or just over. Regarding the total dollar amount of bonus depreciation deductions 

used, aside from the recession year of 2009 ($18 billion) and the 100 percent bonus year of 2011 

($52 billion), bonus use by S corporations during 50 percent bonus years was relatively steady in 

the $24 billion to $28 billion range. The bonus depreciation take-up percentages were relatively 

steady as well, with the take-up percentage for firms generally running in the 50 percent to 54 

percent range, and the take-up percentage relative to eligible investment being generally around 

60 percent. As noted above for the C corporation data, some notable exceptions to the general 

patterns occur for 2011 when 100 percent bonus depreciation was in place: relative to the 

observed take-up rates for most years, bonus depreciation take-up rates were higher for 2011 

while the take-up rates for Section 179 were lower. In terms of the number of firms using the 

provisions, the number of firms using Section 179 expensing fell by about 200,000 in 2011 

compared to the average for surrounding years, while the number of firms using bonus 

depreciation rose by about 200,000 compared to surrounding years. 

 Table 6 presents the data for partnerships. The top line shows, similar to observed for S 

corporations, a steady increase in the number of partnerships, rising from 2.242 million in 2002 to 

3.611 million by 2014. Take-up rates for Section 179 expensing for the number of firms and the 

dollar amount of allowed basis were generally in the 60 percent to 70 percent range (aside from 

2011); however, the take-up rates for Section 179 expensing relative to the eligible investment 

basis were much lower – generally in the 20 percent to 30 percent range. Those results suggest a 

 

15 These observations seem consistent with a view that, in the aggregate at least, bonus depreciation and the 

user cost of capital effects are of, at best, secondary importance for determining investment relative to other 

factors such as the general level of economic activity and the overall investment environment and outlook. 
19 

large number of partnerships that didn’t have sufficient income to meet the income test for using 

the Section 179 deduction – i.e., low taxable income or even in loss position. For 2011, a similar 

pattern as that observed for C corporations and S corporations – although somewhat less 

pronounced – occurs for the lower Section 179 take-up rates by firms and higher bonus 

depreciation use. 

 For individual filers, the results presented in Table 7 show the total number of individual 

filers in the 130 million to 153 million range across the 2002-2014 period with the combined sole 

proprietors, farmers, rental real estate, etc. (from Schedules C, F, and E) accounting for about 31 

million to 40 million over those years.16 On average, about one-fifth (7.1 million to 7.8 million 

per year) of those filers have eligible 179 basis, with about 90 percent of those having allowable 

179 basis once the income test is applied. The take-up percentage, both relative to the number of 

firms and relative to the amount of allowed investment basis, generally is in the 60 percent to 70 

percent range across the years. For bonus depreciation, the take-up rate percentages in the 45 

percent to 49 percent range (other than 2011) relative to the number of filers with eligible basis 

show that generally just less than half of the filers with eligible bonus basis actually use bonus 

depreciation. Relative to the amount of eligible investment, the take-up rates are even lower, in 

the 33 percent to 40 percent range. As for the other legal forms, the 2011 results show fewer 

filers reporting Section 179 expensing deductions and more using bonus depreciation. 

 Table 8 presents aggregate results, which in most cases are the sum of the results across 

the various business forms. We also present some rough comparisons for the observed SOI data 

on investment in comparison to adjusted data for equipment and software from the National 

Income and Product Accounts (NIPAs).17 Care must be taken in interpreting the numbers shown, 

in particular for the total Section 179 numbers; for example, the total number of firms using 

Section 179 is a larger number than would actually claim it because of the use by pass-through 

entities (S corporations and partnerships) that would have to pass-through the Section 179 to the 

final reporters (usually individuals, except for corporate partners). Nonetheless, pass-through 

entities do “use” Section 179 as they report those amounts on the 4562 form, but then the 179 

amounts are passed through to shareholders or partners. Also, for individual filers we do not treat 

each separate schedule filed as a separate reporter. Aggregate amounts of Section 179 and bonus 

deductions are shown at the bottom of Table 8 with the Section 179 values only including the 

amounts reported by individuals (including the amounts from pass-through entities) and C 

 

16 The number here represents the number of individual filers, not the number of separate schedules; hence, 

an individual with multiple schedules for Schedules C, E or F counts as one filer. 

17 These aggregate investment comparisons are not meant to be exact, but rather illustrative of the rough 

relative comparison in magnitude of the amounts of investment in the SOI and the NIPAs. 
20 

corporations. Over the 2003 to 2011 period, the total Section 179 amounts were in the $44 billion 

to $59 billion range, rising only gradually even though the Section 179 investment limits rose 

from $100,000 in 2003 to $500,000 in 2010-2011. Higher Section 179 expensing total amounts 

in the $76 billion to $87 billion range were observed in 2012-2014 with the maintained $500,000 

limit and the economy returning to sustained recovery. For bonus depreciation, the total amounts 

were at just over $200 billion for 2004, 2008 and 2009. The 100 percent bonus year of 2011 saw 

a very large $548 billion total bonus depreciation deduction amount, and the bonus depreciation 

totals were at about $340 billion over 2012-2014 with the return to 50 percent bonus. Looking at 

the total bonus depreciation amounts in Table 8 and comparing back to the bonus depreciation 

amounts in Table 4 for C corporations, it can be seen that C corporations account for about twothirds of all bonus depreciation. The combined total for Section 179 and bonus depreciation 

expensing amounts were around $250 billion to $260 billion for 2004, 2008 and 2009, $348 

billion in 2010, $602 billion in 2011, and in the $422 billion to $435 billion range for 2012-2014. 

 All in all, Table 8 provides a good summary of the data and relationships. There are 

essentially three distinct periods: 2002-2009; 2010-2011; and 2012-2014. And, looking across 

the tables and years, there appears to be a definite shift upwards after the period for 100 percent 

bonus of late 2010 through 2011, both in terms of bonus depreciation claimed and for take-up 

rates. One hypothesis is that 100 percent bonus got a number of firms to claim bonus 

depreciation that otherwise did not do so previously under only 50 percent bonus. Then, once 

having claimed it in 2011, a then higher number of firms continued to claim subsequently under 

the return to 50 percent bonus, perhaps due to (1) having incurred fixed costs (accounting, tax 

reporting and other) to claim it and/or (2) it would have too big a negative impact on cash flows 

not to continue claiming 50 percent. 
21 
22 
23 
24 
25 
26 

7. ECONOMETRIC ANALYSIS: BONUS USE AND ESTIMATED PROBABILITY OF TAKE-UP

 To further examine the role of key variables in determining business use of bonus 

depreciation, we used Probit estimation on selected subset of the C corporation data from 2008. 

Probit estimation is a binary estimation procedure – based on assigning 0 or 1 values to whether a 

firm uses or does not use bonus in this case – that therefore allows us to estimate the probability 

of firm take-up of bonus depreciation for given characteristics.18

7.1 The sample 

 We adjusted the sample by 1) including only those firms with investment basis eligible 

for bonus; 2) eliminating filers reporting consolidated returns; and 3) including only filers with an 

identified state location.19 These changes to the sample help to assure that we have individual 

corporations with eligible bonus property – and for an identified state because we examine the 

role of state depreciation law conformity to Federal law. After these adjustments the sample size 

is 29,869. We use the unweighted data as we are interested in the individual firm behavior and 

not the aggregate numbers or amounts. 

7.2 Specification and results 

 Table 9 presents the results from the probit estimation of the following equation: 

(2) Bonus firm = β0 + β1State + β2InvLife + β3GrsRcpts + β4LossFirm +β5NOLD + ∑ γi Indi

where 

Bonus firm= 1 for firm using bonus depreciation, = otherwise 

State = 1 for State that conforms to Federal for bonus depreciation, =0 otherwise20

InvLifeis the average investment life in years for the firm’s investment21 

GrsRcptsis the firm’s gross receipts, in $millions 

LossFirm= 1 if the firm has net income < 0, = 0 otherwise 

NOLD= 1 if the firm has a net operating loss deduction 

Indi= 1 for firm in 2-digit NAICs industry i, = 0 otherwise (manufacturing dummy is 

 excluded and is the base case of the estimation) 

 

18 This section is a replication of the same material from Kitchen and Knittel (2011). 19 The state location variable from the SOI data doesn’t preclude multi-state locations for component parts 

of the corporation; that relationship could limit the interpretation of the state effects observed in the 

estimation, particularly for large firms. 

20 The state conformity was taken from Gregory and Roll (2010), BNA Daily Tax Report. 21 Note that the weighted average equipment life across all firms in the sample is 5.8 years. 
27 

 The results, in terms of the signs of the coefficients on the explanatory variables, 

generally conform to what should be expected from theory and analysis. But caution should be 

taken in interpreting and applying the results. Because the estimation is Probit, the coefficients of 

the variables do not represent the marginal impact of the explanatory variable on the estimated 

probability. The estimated marginal effect in these estimations would be about one-third the 

magnitude of the shown coefficient estimate; we examine alternative values below but do so by 

letting the estimation software produce the result. Also, the McFadden R-squared is low at 0.04 – 

low even for this measure which is often low in Probit estimations. Hence, although the results 

and following discussion appear reasonable and confirming of priors, there is wide variability in 

the relationships and limited confidence in prediction. 

 In Table 9, the state conformity variable has a positive coefficient, aligning with the 

perspective that a firm would find it easier or less costly to use bonus depreciation if the 

accounting for depreciation were simpler, i.e. being able to use one set of books for depreciation 

treatment for tax purposes. The positive coefficient on the investment asset life term conforms to 

the view that bonus depreciation would be of greater value for firms with longer-lived equipment 

relative to shorter-lived equipment. The positive coefficient on the gross receipts variable 

indicates that larger firms are more likely to use bonus depreciation than smaller firms. The 

negative coefficients on the loss firm variable and on the net operating loss variable conform to 

the expectation that firms in a loss position or using net operating loss deductions would not find 

the immediate, accelerated depreciation deductions of bonus depreciation to be of as much 

value.22 Finally, the coefficients on the industry variables generally seem reasonable as well. 

Recalling that the base case is for manufacturing, the lone coefficient that is positive and 

significant is for the mining industry, a capital intensive industry. The coefficients for most other 

industries are negative and significant (with a few exceptions). Hence, the results suggest that 

higher bonus take-up rates would be expected to occur in manufacturing and mining – and lower 

take-up rates in services and other industries. 

 To illustrate the implications of the results for the probability of a firm using bonus 

depreciation, Table 10 shows the estimated probabilities under various conditions. The first case 

is a large, profitable manufacturing company in a state that conforms to Federal bonus 

depreciation, and with above-average equipment life (10 years); the estimated probability of 

bonus use is about 95 percent. In the second case, if instead of being profitable, the firm is in a

 

22 Note that firms that are in a loss position or with net operating loss deductions greater than the amount of 

bonus deduction available for use still often use bonus depreciation; net operating losses can be carried 

forward, for example. In the restricted sample used for the estimation for Table 8, of the 17,431 firms that 

used bonus depreciation 7,026 were in a loss position. 
28 

 
29 

 
30 

loss position then the estimated probability drops by about 15 percent to 80 percent. The third 

case considers a large manufacturer in a nonconforming state, in a loss position, and with average 

equipment life (6 years); the estimated probability for bonus use is 62 percent. Cases 4, 5 and 6 

examine small to medium manufacturing firms in nonconforming states, with short to average 

equipment life and varying loss or net operating loss deduction status; the probabilities are in the 

56 percent to 60 percent range. Case 7 considers a large, profitable mining firm in a conforming 

state with above average equipment, yielding an estimated probability of 90 percent (similar to 

the first case, except for mining instead of manufacturing and about two-thirds as large in terms 

of gross receipts). Cases 8 and 9 consider small firms that are in loss position, with short-toaverage life equipment, in nonconforming states, in agriculture and in services; the estimated 

probabilities are low, at 36 percent and 34 percent. 

8. SELECTED ISSUES

 This section provides information and data on several additional issues, including the 

distribution of bonus depreciation and Section 179 use by industry, the distribution by income 

levels, and the challenge of properly accounting for “used” property in making the estimates. 

8.1 Distribution of bonus depreciation and Section 179 use by industry 

 To provide some further information and context that readers and analysts may find of 

value, Table 11 presents data from 2008 on the use of bonus depreciation and Section 179 

expensing by C corporations by two-digit NAICS industry. The data show that, as might be 

expected, manufacturing accounts for a large share (23 percent) of the use of bonus depreciation 

with information, wholesale trade and utilities also representing important shares. For Section 

179 use by C corporations, the largest users are construction; agriculture, forestry, fishing, and 

hunting; manufacturing; wholesale trade; and professional, scientific and technical services. 

8.2 Distribution by income levels 

The distribution of the use of Section 179 and bonus depreciation according to a gross 

income measure (see Table 12) is largely as one might expect23. Section 179 deductions, with 

their investment limits, are concentrated more at lower income levels; bonus depreciation, with 

the unlimited amounts of eligible investment, end up being used more by large firms at higher 

income levels. For example, for individuals, the predominant use of both bonus depreciation and 

 

23 The gross receipts measure used here is derived in a manner similar to that in the Knittel, et al, (2011) 

paper on small businesses. 
31 

Section 179 expensing – generally in excess of 80 percent -- was for gross receipts less than $1 

million. In contrast, for C corporations, S corporations, and partnerships, the use of Section 179 

expensing was distributed over a broader income range, but with all occurring for firms with less 

than $1 billion in gross receipts. In the aggregate, the totals shown at the bottom of Table 12 

show that generally about one-half or more of Section 179 expensing occurs for firms with less 

than $1 million in gross receipts. Use of bonus depreciation is generally fairly evenly distributed 

across income ranges for S corporations and partnerships, but for C corporations bonus use is 

heavily weighted in the high income range, with more than 75 percent for firms with gross 

receipts in excess of $1 billion. In aggregate, the total use of bonus depreciation is heavily 

affected by the C corporation distribution, and the majority use – in the range of 56 percent to 65 

percent over the different periods shown – is for firms with gross receipts in excess of $1 billion. 

8.3 The challenge of properly accounting for “used property” for bonus basis 

 In calculating the amount of bonus basis that was eligible for use for bonus we had to 

make some assumptions for special issues. In particular, because used property is not eligible for 

bonus depreciation, we had to make assumptions about what share of reported basis was “used” 
32 
33 

and not “new”. We relied on the Annual Capital Expenditure Survey (ACES) data to make that 

application -- assuming that 6 percent of reported basis was “used” property. The ACES data is 

the best available data that we are aware of. Nonetheless, to the extent that actual reported 

investment basis that is “used” differs from that assumption, the amount of eligible basis in the 

denominator for the take-up calculation would also be affected. Although the results generally 

seem reasonable, we still cannot say definitively that they aren’t affected by the “used” property 

assumption we have used. The results for 2008 are an example here. For C corporations, the 

bonus take-up rate (relative to the amount of investment) is at its lowest -- 47 percent -- in 2008. 

It is possible that there were increased mergers and acquisitions of firms or purchases of property 

of failed firms in 2008 as the U.S. economy entered the “great recession.” If so, the share of used 

property in investment might have been higher in 2008 than in other years, and if improperly 

accounted for it would overstate the amount of new property and understate the bonus take-up 

rate. Even so, the ACES data did not indicate such a relative change in used property acquisition. 

We recognize that the results presented can be sensitive to the assumptions made and the 

calculations involved. 

9. CONCLUDING COMMENTS

 This paper presents data and evidence on the use of special accelerated depreciation 

provisions of the past decade, for Section 179 and bonus depreciation. Although firms used both 

provisions, the observed take-up rates indicate the provisions were not used as extensively as 

might have been expected a priori or in full conformance with the policy perspective of providing 

a significant investment incentive. Using SOI tax data over the 2002-2014 period, we observed 

that corporations, pass-through entities, and individuals used Section 179 expensing in the 60 

percent to 80 percent range, both in terms of the numbers of firms and relative to total allowed 

investment amounts. For bonus depreciation, in the years 2002-2004 and 2008-2014, the 

effective take-up rates were lower than observed for Section 179 expensing. The number of firms 

using bonus depreciation for eligible investment generally was in the 40 percent to 60 percent 

range relative to the number eligible, while the bonus depreciation deduction relative to the 

eligible investment amount generally was in the 50 percent to 70 percent range for C corporations 

and S corporations, but was at lower ranges of about 40 percent to 60 percent for partnerships and 

30 percent to 40 percent for individuals. Total business use of Section 179 expensing and bonus 

depreciation over the 2002-2014 period averaged nearly $300 billion per year, and more recently 

over $400 billion per year for 2012-2014. We examined factors that help explain why firms 

would forgo use of bonus depreciation. In many cases, bonus depreciation may have afforded 
34 

little, if any, benefit. Specifically, loss firms and firms with loss carryforwards may realize little 

cash flow benefit. 

 Probit analysis of C corporation data from 2008 produced results consistent with such 

theoretical priors that bonus depreciation use is limited by firms in a loss position, and by firms 

with net operating loss carryforwards. In addition, the analysis also is consistent with firm’s use 

of bonus depreciation being positively related to 1) the firm’s location in a state whose bonus 

treatment conforms with Federal bonus depreciation; (2) average equipment investment life; 3) 

the size of the firm; and 4) the firm being a manufacturing or mining firm relative to being in 

other industries. 

 While the reasons for the low bonus take-up rates are not fully understood, as discussed 

in Knittel (2007) that result is consistent with the corporate response to the implementation of the 

Asset Depreciation Range (ADR) system in 1971. The Revenue Act of 1971 provided a range of 

asset lives for various classes of assets placed in service after December 1970. The Revenue Act 

of 1971 allowed firms to use shorter asset lives than provided for under prior law. Although more 

generous depreciation allowances were made available, Vasquez (1974) found that many firms 

elected not to use the ADR system and instead used less generous schedules that decreased the 

present value of deductions. Even among large firms, Vasquez found that only 63 percent of 

firms elected to use the ADR system. Similar to our results, Vasquez found higher utilization 

rates for industries dominated by large firms with longer-lived property. 

 In general, the analysis presented here indicates that bonus depreciation can, in theory, 

reduce the cost of investment and provide an investment incentive and cash flow benefits, and the 

data presented show its extensive use by businesses over the years. In practice, however, various 

factors limit the use of bonus depreciation and its relative value for boosting investment. 

 
35 

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from the Past Decade,” in Alan D. Viard, ed., Tax Policy Lessons from the 2000s, American 

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APPENDIX A -- IRS FORM 4562A 
39 
40 

APPENDIX B -- LEGISLATIVE HISTORY FOR SECTION 179 AND BONUS DEPRECIATION MAIN PROVISION
41 
42 

APPENDIX C -- DETERMINATION OF INVESTMENT BASIS FOR SECTION 179 AND BONUS

The calculation of the investment basis amounts for Section 179 and bonus depreciation 

deductions is based on data reported on -- and closely follows the structure of -- IRS Form 4562: 

Depreciation and Amortization (see Appendix A). However, because there is not an exact 

alignment of the Form 4562 data with statutory definitions of qualified eligible property, and also 

because of the Section 179 investment limits, special accounting and imputations must be made. 

Qualified Property 

The following descriptions of qualified property are based on information presented in IRS 

Publication 946: How to Depreciation Property (see Publication 946 for more details). 

Qualified Property, Section 179 Deduction 

To qualify for the Section 179 deduction, property must be eligible property purchased for 

business use. 

1. Tangible personal property (generally machinery and equipment and similar, not real 

property, but including off-the-shelf computer software). 

2. Other tangible property (except buildings and their structural components) used as: 

a. An integral part of manufacturing, production, or extraction or of furnishing 

transportation, communications, electricity, gas, water, or sewage disposal services, 

b. A research facility used in connection with any of the activities in (a) above, or 

c. A facility used in connection with any of the activities in (a) for the bulk storage of 

fungible commodities. 

3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of 

Publication 225 for definitions and information regarding the use requirements that apply 

to these structures. 

4. Storage facilities (except buildings and their structural components) used in connection 

with distributing petroleum or any primary product of petroleum. 

5. Off-the-shelf computer software. 

6. Qualified real property (qualified leasehold improvement, restaurant, retail improvement 

property). 

Land and improvements and other “excepted property” do not qualify for the Section 179 

deduction. 

Qualified Property, Special Depreciation Allowance (Bonus Depreciation) 

1. New property, one of the following types: 

a. Tangible property depreciated under the modified accelerated cost recovery system 

(MACRS) with a recovery period of 20 years or less. 

b. Water utility property 

c. Computer software that is readily available for purchase by the general public, is 

subject to a nonexclusive license, and has not been substantially modified. 

d. Qualified leasehold improvement property 

2. Property acquired by purchase during period bonus provision is in place, and no prior 

binding contract in place 

3. Property must be placed in service by ending date for bonus provision (an additional year 

for long-production period and certain aircraft property) 
43 

Excepted Property:

1. Property placed in service and disposed of in the same year 

2. Property converted from business use to personal use in same tax year it is acquired 

3. Property required to be depreciated under the Alternative Depreciation System (ADS). 

4. Property for which election made to not claim special depreciation allowance. 

5. Qualified restaurant property (post 2008) 

6. Qualified retail improvement property (post 2008) 

7. Property for which election made to accelerate certain credits in lieu of special 

depreciation allowance 

Some Specific Adjustments to the Data 

In examining the detailed data, we observed several special cases and potential misreporting that 

needed to be accounted for. We observed a number of firms that appear to have reported all their 

depreciation deductions in the “Other depreciation” field of Form 4562 line 16, and no other 

detail; in many cases, these were very large amounts and appear to have been an accounting 

convenience and did not reflect the correct accounting for basis and depreciation deductions. We 

chose to eliminate those firms from our accounting. Other firms would report deductions for a 

specific MACRS asset class, but not any associated basis; for those cases, we imputed a basis 

amount from the reported deduction. For firms that reported a bonus depreciation deduction, but 

then did not have reported basis equivalent to what mathematically would be the required amount 

of basis, we imputed the basis to properly reflect the amount for that reported bonus deduction. 

Calculation of Section 179 Investment Basis 

Section 179 Limits: Section 179 deductions are targeted toward small businesses, and are 

therefore limited by law, capped by a “dollar limitation” and a “reduction in limitation” (a phaseout once investment reaches and exceeds certain levels). The tables in the text of the paper show 

the dollar limitation and the phase-out level; Appendix B shows the legislative history for these 

limits. For example, in 2008, the general Section 179 deduction was limited to a maximum of 

$250,000 and that limit was reduced dollar-for-dollar as investment exceeded $800,000 (the 

reduction in limitation), with a total phase-out for investment at $1,050,000. 

Adjusting for Disaster and Other Amounts: During the years under consideration in this study, 

legislation for several special cases expanded the amounts of the allowed Section 179 deductions 

for disasters -- including for the New York Liberty zone, Gulf Opportunity Zone, Recovery 

Assistance property, and Disaster Assistance property. We chose to focus on the general Section 

179 deduction and to exclude these amounts. The calculation of the investment basis amounts for 

the case of Section 179 deductions therefore begins by capping the Section 179 deduction amount 

at the maximum permitted under the general Section 179 limits. The amounts for these special 

disaster provisions generally were a very small part of the total; for example, for S corporations in 

2008 the difference represented less than $33 million of the $21.4 billion total for Section 179 

deductions. 

“Eligible Property” Basis: The calculated eligible property basis for Section 179 is the sum of 

the capped Section 179 deduction, reported bonus depreciation, the reported basis amounts for 3-, 

5-, 7-, 10-, 15-, and 20-year property, and an imputed software investment basis. The amount of 

software investment is imputed as it is not reported on Form 4562; software deductions are 
44 

reported in line 16 “Other depreciation”. Based on examination of NIPA data for off-the-shelf 

software investment and calculations based on various depreciation patterns, we estimated that a 

reasonable imputation for software investment basis was to use approximately 84 percent of the 

current year “other depreciation” amount. One additional component for the basis is the inclusion 

of the “carryover of disallowed [Section 179] deduction” from the prior year. The amount of the 

calculated total basis from the summation was then subjected to the Section 179 dollar limitation 

and the phase-out of the reduction in limitation to determine the eligible Section 179 basis. Note 

that listed property amounts included in the reported Section 179 deduction are included in this 

calculated amount of basis, but no additional amounts of listed property beyond that are included 

(as listed basis amounts are not reported). Note that reported amounts of bonus depreciation are 

included in this calculation; Section 179 is eligible for claiming prior to bonus and allows for full 

expensing, so if bonus is used instead it would represent basis eligible for Section 179 that wasn’t 

used for the Section 179 deduction. 

The Section 179 Income Test and “Allowed” Basis: In addition to the investment limit and 

phase-out, Section 179 deductions are subject to a business income limit -- as Publication 946

states: “limited to the taxable income from the active conduct of any trade or business during the 

year.” Disallowed deduction amounts resulting from the income limitation can be carried over to 

subsequent years. Using reported income variables by reporter, we calculated the amount of 

eligible basis under the business income limit to determine the amount of “allowed” basis for 

Section 179 deductions in the current year. 

Calculation of Basis Eligible for Bonus 

The calculation for the eligible basis for bonus was similar to that described above for the eligible 

property basis for Section 179 -- the sum of the MACRS basis amounts, imputed software basis, 

and reported bonus depreciation -- but the Section 179 deduction amount and any Section 179 

carryover amounts are not included in the calculation. Another notable difference is that only 

“new” property and not “used” property, is eligible for bonus depreciation. Examination of data 

from the Census Bureau’s Annual Capital Expenditure Survey (ACES) over a variety of years 

showed that expenditures on used investment typically represented about 6 percent of total 

investment expenditures for equipment. To account for used investment, we therefore reduced 

the calculated basis by 6 percent. We did not include listed property in our calculations for bonus 

depreciation and basis. On Form 4562, the amount of listed property bonus depreciation is 

reported separately and included in listed property deductions, but because listed property basis 

amounts were not available a useful comparison could not be made including listed property.