Late last month, U.S. Senator James Lankford (R-OK) introduced an important new bill that would extend important tax benefits to American businesses. The bill, the Accelerate Long-term Investment Growth Now (ALIGN) Act, and its companion House bill, would make permanent a feature of the 2017 Tax Cuts and Jobs Act (TCJA) responsible for incentivizing capital investment. That provision is 100 percent bonus depreciation.
Described at length in Section 168(k) of the Internal Revenue Code, 100 percent bonus depreciation allows qualifying businesses to write off the total cost of new assets in the same year rather than amortizing, or applying, the reduction in taxable income over a longer period of time. Since 2017, businesses have had the freedom to use this generous tax provision to save money immediately on capital expenditures.
Capital expenditures include machinery, capital equipment and other large assets that require significant investment. These assets are nondurable goods with multi-year lives, making the benefits provided by the tax provision particularly effective for facilitating capital formation. An office building typically has a useful life of 39 years, while a computer, due to its quick obsolescence, lasts on average only five years.
Until January of this year, businesses were allowed to deduct 100 percent of most capital expenditures directly from sales, thereby reducing their tax exposure. In 2020, about 80 percent of business equipment and structure purchases were eligible for bonus depreciation. Studies have routinely found that such tax incentives increase business investment and employment.
The tax provision was only introduced on a temporary basis and began its sunset phase-out period at the end of 2022. This phase-out means that the allowance of 100 percent bonus depreciation will drop by 20 percent annually until it reaches zero after 2026, with this year marking the first major drop. Consequently, businesses that maintain the same level of investment will be exposed to increasingly high levels of taxation. This disincentive to invest, in turn, will lead to fewer job opportunities and reduced economic output. With inflation still an ongoing concern for many businesses when deciding whether to purchase machinery and other equipment, that outcome doesn’t bode well for the health of the economy.
The ALIGN Act would remedy this situation by making 100 percent bonus depreciation a permanent feature of the Internal Revenue Code. Specifically, it would amend Paragraph 6, Section 168K of the Code to allow “full expensing” for qualified property. This small change would go a long way toward reassuring businesses that the government cares about their future and is committed to supporting pro-growth policies.
It would also boost economic activity by increasing the flow of cash for these businesses through a reduction in taxes. This would, in turn, create a positive spillover effect that not only benefits the businesses that utilize the tax allowance for capital purchases, but also the businesses responsible for those sales.
According to the Tax Foundation, under a four percent inflation scenario, permanent 100 bonus depreciation would increase long-run output by five percent, raise American incomes by four percent and create roughly 94,000 jobs. With benefits like these, it’s hard to see why lawmakers wouldn’t jump at the opportunity to make this important tax provision permanent.
A large coalition of policy organizations recently sent a letter to lawmakers urging them to strongly consider the many the ALIGN Act would provide taxpayers and consumers by allowing businesses to continue expensing capital investments. Lawmakers owe it to the American people to fully explore this possibility.
Nate Scherer is a Policy Analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us on www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.