Tax Foundation: bonus depreciation shifts corporate tax burden to economic profits

The Tax Foundation argues in an Oct. 21 analysis that permanent bonus depreciation for machinery and equipment and immediate expensing for R&D costs concentrate the corporate tax burden on economic profits. Both provisions were enacted under the One Big Beautiful Bill Act.

Expensing lets a firm deduct the full cost of a capital investment in the same year the asset starts being used. Matching the deduction to the outlay preserves its value, the post says. Deductions taken in later years lose value to inflation and to the opportunity cost of the delay. That removes the tax code's penalty on the marginal investment, the project that only just covers its cost of capital.

Expensing does not subsidize an investment that isn't worthwhile on its own merits, and it does not eliminate the tax on profit earned above the break-even return. The Tax Foundation separates the normal return, the amount needed to break even, from the supernormal return that arises when a firm earns economic profits. Expensing takes the tax burden off the first; the second stays taxable.

The Tax Foundation writes that most commentary raising questions about how expensing interacts with data center and AI investment misunderstands the provision. It illustrates the point with two firms each putting $100 into an investment. It assumes 2 percent inflation and a 3 percent real discount rate, which it approximates at 5 percent. One firm's project just breaks even, returning $105 in year two.

The post frames the provisions as permanent features of the corporate code rather than temporary timing benefits.