As the American economy begins to show signs of slowing down, many fear how their jobs and purchasing power could be affected. Though inflation seems to have peaked, the cost has been historic credit rate hikes and retracting credit, leading to increased consumer debt. The last thing Americans need now is increased business expenses and lower investments, which will occur if bonus depreciation is allowed to phase out. Representatives from both parties have expressed concern over this development but must compromise if they wish to act.

Outlined in Section 168(k) of the Internal Revenue Code, 100 percent bonus depreciation permits businesses to write off the total cost of new assets in the year they are purchased rather than applying the reduction in taxable income over several years. Essentially, companies can immediately deduct from their taxable income the money spent on assets like equipment and machinery that will lose value and break down over time. Money saved on capital costs encourages businesses to make further investments and frees up revenue for more productive uses, like higher salaries for new hires.

Unfortunately, this tax feature was given a sunset clause, starting earlier this year, that reduces the depreciable share of qualified assets by 20 percent annually until it reaches zero after 2026. The sunset could not have started at a worse time. With an economic slowdown right around the corner, the increased tax burden on businesses will likely cause financial hardship.

An American Economic Association study found that tax incentives like bonus depreciation increased capital investment and jobs, and were particularly beneficial to small firms. Small businesses are in an awful rut today; as their primary source of credit, local banks tighten lending. Lowering the cost of capital by allowing an immediate asset expense deduction would counteract many of the negative implications of reduced bank credit. Though loans may be harder to come by and incur higher interest, the equipment, and assets that small businesses would be using those loans to buy are cheaper under 100 percent bonus depreciation.

Equipment like vehicles, machinery for manufacturing, and computer hardware are the lifeblood of any small business but usually require significant upfront investments. Because these assets will often take years to depreciate, being able to deduct the total depreciated value from your tax obligation in the year of purchase eases expenses. Bonus depreciation also helps incentivize business investment, boosts capital accumulation, and create new employment opportunities for Americans. Allowing it to phase out now would deliver a significant blow to the economy.

There is bipartisan agreement among Democrats and Republicans that 100 percent bonus depreciation is beneficial to the economy and well worth the financial investment. So why hasn’t this tax provision been extended like the Build in America Act proposed? The main issue is that some lawmakers’ support for such an extension, and other pro-businesses policies like full R&D expensing, is contingent upon any tax package including other agenda items like an expanded Child Tax Credit. While not ideal, such compromises may be necessary to extend this important tax feature. Even better would be for Congress to make this tax feature permanent.

It remains to be seen if Congress can reach a timely agreement on a tax package. However, one thing is sure: American livelihoods hang in the balance. Lawmakers should do the right thing and extend this valuable tax provision. 

This was published in the Economic Standard.