U.S. Corporations Are Only Able to Deduct 87 Percent of Capital Investment

January 21, 2016

U.S. Corporations Are Only Able to Deduct 87 Percent of Capital Investment

Report quantifies how much businesses are losing due to flawed cost recovery system

Washington, DC (Jan 21, 2016)—While businesses are generally allowed to deduct expenses from their taxes in the year a purchase was made, the rules change when it comes to a business’s capital investments (buildings, machines, etc.). The tax code requires corporations to deduct the cost of these investments over time periods ranging up to 50 years, which actively discourages businesses from making investments and encourages them to spend their money on other things. As a result, businesses in the U.S. are only able to deduct 87.14 percent of the value of their initial investments, according to a new report from the nonpartisan Tax Foundation.

“Virtually all economists agree that investment is one of the main drivers of economic growth, but our tax code actively incentivizes businesses to not invest and instead spend their money on other things,” said Tax Foundation Analyst Scott Greenberg. “Combine that with the highest corporate tax rate in the industrialized world, and it’s not hard to see why many argue that reform is needed.”

There is a provision in the tax code known as “bonus depreciation,” which speeds up the rate at which a company recovers the cost from its investment. However, bonus depreciation is currently pending expiration, and without it, businesses would only be able to deduct 83.08 percent of the value of their investments on average.

“Ultimately, it would not be difficult for tax policymakers to reform the code to allow businesses to fully write off the cost of their capital investments in the year they were made [known as ‘full expensing’], rather than over the course of many years. Moving to full expensing would help level the playing field for competing industries and businesses. Further, one study showed that this single change to the code would grow the U.S. economy by more than 5 percent in the long term, by encouraging additional investment,” added Greenberg.

The report quantifies how much of capital expenditures businesses are prevented from deducting and details the unfair treatment of different industries in the current system. Its key findings include:

  • Many economists argue that a system of full cost recovery would be maximally efficient. However, the current U.S. tax code requires corporations to deduct investments over time periods ranging up to 50 years, leading to limited cost recovery.
  • Overall, U.S. corporations will only be able to deduct 87.14 percent of the value of investments made in 2012 over time.
  • If not for bonus depreciation, corporations would only have been able to deduct 83.08 percent of the value of investments made in 2012 ever time.
  • The extent of cost recovery varies by industrial sector and by asset, reflecting the numerous depreciation schedules to which different industries and assets are subject.
  • The current system of cost recovery prevents corporations from making investments that would otherwise be profitable under a system of full cost recovery.

Read the full report: Cost Recovery for New Corporate Investments in 2012

Media Contact:
Richard Borean
Manager of Communications
Tax Foundation
202-464-5120
borean@taxfoundation.org

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.

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The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.