Making a More Beautiful Tax Bill
Senate Republicans are pitching President Trump on improvements to the House tax bill, and one important priority is making its business tax cuts permanent. This would help the economy and provide businesses with more certainty amid tariff disruption and deficit fears.
One of the 2017 tax reform's most constructive changes was letting businesses immediately deduct the full cost of capital investments rather than spread them out. Instead of writing off a $100,000 machine over its useful life-span—say, $10,000 a year over 10 years—businesses were allowed to immediately expense the full cost as they do operating costs.
Because inflation reduces the value of future deductions, a company might recover only 80% or less of the cost of an investment under typical depreciation schedules. By reducing the cost of capital, expensing spurs investment. It also eliminates tax distortions that are created when businesses in different industries write off assets on different schedules.
Republicans in 2017 made full expensing temporary because they wanted to keep the estimated cost of their tax bill to $1.5 trillion. Full expensing for equipment began to phase out after 2022. Companies that year also had to begin deducting their research and development costs over five years rather than immediately, which upended a decades-old policy.
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