Bonus depreciation: the PATH Act and beyond.

• Author: Puhl, Jacob
• Position: Protecting Americans from Tax Hikes Act of 2015

Over the past several decades, a trend in U.S. tax law has allowed businesses to recover the cost of capital investments more quickly to incentivize economic growth. So-called straight-line tax depreciation--i.e., where an equal amount of the cost basis is deducted over the useful life of the asset--generally has been replaced by regimes favoring accelerated depreciation, in which businesses can deduct more cost basis in early years. The Tax Reform Act of 1986, P.L. 99-514, maintained this trend when it established the modified accelerated cost recovery system (MACRS), which is still in use today.

Legislative History

In 2002, with the enactment of the Job Creation and Worker Assistance Act, P.L. 107-147, businesses could accelerate deductions for an even larger portion of their capital expenditures. So-called bonus depreciation--provided for by Sec. 168(k)--is deducted first during the tax year in which eligible property is placed in service, followed by the MACRS deduction (which is determined after reducing the original cost basis of the property by the bonus depreciation amount). The introductory bonus rate of 30% applied to eligible property acquired after Sept. 10, 2001 (retroactive from passage of P.L. 107-147), and placed in service before Jan. 1, 2005.

The following year, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), P.L. 108-27, increased the bonus rate to 50% for eligible property originally used after May 3, 2003, and placed in service before Jan. 1, 2005. After JGTRRA, there was not an extension until 2008 and, as a result, the provision lapsed for three years. Bonus depreciation of 50% was again revived by the Economic Stimulus Act of 2008, P.L. 110-185, for eligible property acquired by the taxpayer after Dec. 31, 2007, and placed in service before Jan. 1, 2009. The placed-in-service date was extended to Jan. 1, 2010, by the American Recovery and Reinvestment Act of 2009, P.L. 111-5. The bonus rate reached 100% for assets acquired after Sept. 8, 2010, and before Jan. 1, 2012, and placed in service before Jan. 1, 2012, pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (100% bonus depreciation is often referred to as "full expensing" because the purchasing business deducts the entire cost basis from its taxable income in year 1).

Upon the expiration of the 100% bonus rate, the 50% bonus depreciation was extended to property acquired and placed in service through the end of 2013 by the...