Three Facts Straightening Out the Debate Over Bonus Depreciation

# Overview

US capital investment has risen above projections, driven in part by AI-related buildout and data-center spending. That investment boom interacted with provisions in the 2025 tax law (the One Big Beautiful Bill Act, or OBBBA) that changed how firms recover the cost of capital. The changes have contributed to a sharp decline in corporate tax receipts, prompting three common misunderstandings about bonus depreciation.

# Three factual clarifications

1) Expensing is a timing rule, not a permanent extra deduction

2) The OBBBA made three specific cost-recovery changes

• 100 percent bonus depreciation for short-lived investments was restored (the policy had been phased out after the 2017 law). This lets qualifying short-lived assets be fully deducted in the year placed in service.

• Temporary 100 percent expensing for qualified structures: certain buildings placed in service before specific 2029/2031 cutoffs can be fully deducted.

3) Faster expensing reduces measured corporate tax receipts in the short run but is not necessarily a long-run revenue loss

When firms shift deductions earlier, taxable income and corporate tax receipts decline in the years deductions accelerate. The context notes corporate tax receipts fell about 25 percent over the past year as investment surged and more deductions were taken up front. That decline reflects timing and compositional changes in taxable income rather than proof of a permanent corporate tax cut equal to the observed short-term revenue drop.

# Why timing matters economically

Depreciation that stretches deductions into the future raises the real after-tax cost of capital. Inflation and the time value of money erode the present value of delayed deductions, so spreading deductions makes investments effectively more expensive than immediate expensing does. Aligning deduction timing with when cash is spent removes that implicit tax penalty, lowering the cost of capital and encouraging marginal investment projects that can raise productivity and wages over time.

# Fiscal and policy implications

• Short-term revenue effects: Faster expensing compresses deductions into earlier years and lowers near-term corporate receipts. That accounts for much of the recent drop in collections tied to the investment surge.
• Distribution and targeting: The OBBBA provisions apply broadly across asset types. While headlines often emphasize AI servers and data-center HVAC, the rules are neutral across many qualifying assets.
• Budget scoring and permanence: Treating expensing as a timing change matters for how one assesses long-run fiscal cost. Restoring or making expensing permanent would have different long-term budgetary implications than a temporary acceleration.

# Bottom line