The 2025 tax package, known as the One Big Beautiful Bill Act (OBBBA), restores permanent 100 percent bonus depreciation for short‑lived assets and adds several other expensing provisions. By allowing firms to deduct the full cost of qualifying investments in the year they are placed in service, the law changes the timing of deductions rather than providing an outright tax cut.
Expensing versus depreciation
- Bonus depreciation – 100 % of the cost of short‑lived equipment (e.g., AI servers, HVAC for data centers) can be deducted immediately. This provision existed temporarily after the 2017 tax reform but was slated to phase out.
- Full expensing for domestic R&D – Companies may retroactively expense R&D incurred after the 2021 amortization start date, or accelerate remaining amortization over one or two years.
- Qualified‑structure expensing – 100 % expensing for certain buildings constructed before 2029 and placed in service before 2031.
These measures align tax deductions with actual cash outlays, eliminating the “tax penalty” that arises when depreciation spreads deductions over many years and erodes their real value through inflation.
Short‑run impact on corporate tax receipts
Accelerated deductions lower corporate tax payments in the early years of the transition. The Tax Foundation’s conventional (static) estimate projects:
- Bonus depreciation – revenue loss of $79.5 billion in 2026, falling to $21.5 billion by 2035; total static loss of $473.1 billion from 2025‑2035.
- Qualified‑structure expensing – about $27 billion of static revenue loss over the same window.
- R&D expensing – roughly $178 billion of static loss, concentrated in the first two years because of retroactive restorations.
Dynamic (macro‑economic) modeling, which incorporates higher GDP and payroll‑tax revenues from a larger economy, reduces the estimated cost to about $44 billion from 2025‑2035—a fraction of the static figure. The policy is expected to boost long‑run GDP by 0.6 percent, generating additional tax revenue that partially offsets the timing loss.
Why expensing is not a subsidy
Expensing removes a distortion in the tax code that raises the user cost of capital for marginal projects. Under a depreciation system, some investments that would be profitable on an economic basis are abandoned because the delayed tax benefit makes them unattractive. Full expensing eliminates this barrier, allowing firms to evaluate projects based on real returns rather than tax timing.
The change is broad‑based and neutral: it does not target specific industries or technologies, and it does not create a new tax incentive. Instead, it ensures that all businesses can deduct investment costs when incurred, preserving revenue on profitable projects while avoiding a tax penalty on marginal ones.
Bottom line
The OBBBA’s expensing provisions are a timing adjustment that aligns tax deductions with cash expenditures, leading to an anticipated short‑term dip in corporate tax receipts. The dip may be amplified by the current AI‑driven investment surge, which is largely independent of tax policy. Over the longer horizon, the economy‑wide benefits of lower capital costs and higher GDP are expected to recoup most of the initial revenue loss, while still preventing the tax code from discouraging marginal investment.
Source article: taxfoundation.org
