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Full Expensing

Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.

How Does Full Expensing Impact Businesses?

When businesses calculate their income for tax purposes, they subtract their costs. This makes sense because the corporate income tax is a tax on business profits, or generally, revenues minus costs. However, businesses are not always allowed to subtract the amount they spend on capital investments, such as when businesses purchase equipment, machinery, and buildings. Typically, when businesses incur these sorts of costs, they must deduct them over several years according to preset depreciation schedules, instead of deducting them immediately in the year the investment occurs. Depreciation schedules are designed with the useful life of an investment in mind. If the typical industrial machine lasts for 15 years, then a business would deduct the costs for a similar machine over a 15-year period.

Full expensing allows for immediate deductions of capital costs in the year the expense occurs.

This is the appropriate treatment of business investment because costs should be immediately deductible when assets are bought. Higher costs lead to less capital and slower economic growth, whereas lower costs grow the economy and with it the number of jobs and the level of wages. Investments that were previously not profitable can become profitable under full expensing, due to the reduction in the cost of capital.

Full expensing recognizes opportunity cost and the time value of money. It makes the tax code neutral toward investment, rather than discouraging it. Importantly, business investment will increase under full expensing, holding all else equal, because it lowers the cost of capital and removes the tax bias that discourages investment.

Is Full Expensing Part of U.S. Tax Policy?

As part of the 2017 Tax Cuts and Jobs Act (TCJA), lawmakers adopted temporary full expensing for short-lived assets. The policy allows businesses to fully deduct the cost of their investments immediately rather than over the number of years prescribed by depreciation tables.

However, the policy began phasing out in 2022 and ultimately expires at the end of 2026. Proponents of a long-term stable policy of full expensing have argued for this policy to be made permanent.

This policy does not apply to longer-lived assets like buildings, partially because the short-term revenue cost of extending full expensing to structures is much more significant than for shorter-lived investments.

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