ACCT 401 Week 5 Group Discussion Board Forum 3 Example

Group Discussion Board Forum 3: Bonus Depreciation and Cost Recovery

ACCT 401 Individual Taxation, Group Discussion Board Forum 3

Thread by [Student Name]

The business, its purchase and the classmates are composites; the MACRS rate is the IRS table rate, and the textbook, Scripture and research cited are real.

Ortiz Heating and Air, a composite sole proprietorship, buys $80,000 of shop and service equipment, including refrigerant recovery machines, diagnostic tools and a used sheet-metal brake, in March 2025 and places it in service that month. Under the IRS class lives, shop machinery like this is recovered over seven years. Under regular MACRS with the half-year convention, the first-year deduction is 14.29% of the basis, or $11,432, with the rest recovered over the following seven tax years (Spilker et al., 2018). Under 100% bonus depreciation, the entire $80,000 is deductible in 2025. If the owner's combined marginal income and self-employment tax rate is about 30%, regular MACRS saves about $3,430 of tax in 2025, while bonus depreciation saves about $24,000. My position is that immediate expensing is good tax policy for small businesses, because it changes the timing of deductions in a way that matters most to the firms with the least access to credit.

Bonus depreciation does not create new deductions. Over eight years, the two methods deduct the same $80,000, so the policy works through the time value of money. Discounted at 7%, the MACRS deductions spread across eight tax years are worth about $67,600 today, roughly $12,400 less, while the bonus deduction is worth its full amount today. For a firm that would otherwise borrow to buy the equipment, the tax saved in the first year can cover a large part of the down payment. The rule has changed often: the 2017 law allowed 100% bonus depreciation, then phased it down to 80% in 2023, 60% in 2024 and 40% in 2025, and legislation enacted in July 2025 restored 100% for property acquired after January 19, 2025. Ortiz bought in March, so it qualifies. Because the rule changed so often, a business that bought equipment in early January 2025 would have received only 40%, while the same purchase a few weeks later received 100%, which illustrates how much timing can matter under this provision.

Research suggests that the timing matters to investment. Zwick and Mahon (2017) studied more than 120,000 firms and found that bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4% in 2001 to 2004 and 16.9% in 2008 to 2010. Small firms responded 95% more than large firms, and firms responded strongly when the incentive produced immediate cash but not when the benefit came only in future years. House and Shapiro (2008) also found that investment in qualified capital rose sharply under bonus depreciation, and they detected no evidence that equipment prices rose to absorb the subsidy. A deduction taken today is worth the most to the business that has the hardest time borrowing against tomorrow.

Jesus's parable of the talents commends servants who put resources to productive use (Matthew 25:14-30; English Standard Version Bible, 2001/2016). Bonus depreciation can encourage that kind of stewardship when it helps an owner invest in tools that make the business more productive. It can also tempt owners to buy equipment they do not need just to reduce taxes. A tax adviser serves the client well by asking whether the purchase makes sense before the deduction, and by reminding the client that a deduction taken now means less depreciation to deduct later.

Reply to Jordan

Jordan, your thread argued that bonus depreciation is essentially free money for small businesses, and I agree that the first-year cash benefit is large. Your example of a landscaping company buying mowers showed the benefit clearly. One cost deserves attention, though: what happens when the property is sold. Spilker et al. (2018) explain that when Section 1245 property such as machinery is sold, gain up to the total depreciation already deducted is recaptured and taxed as ordinary income. Suppose Ortiz sells the equipment after three years for $45,000. Because bonus depreciation reduced its basis to zero, the entire $45,000 is gain, every dollar of it treated as recaptured ordinary income, taxed at the owner's regular rates rather than at capital gains rates. Under regular MACRS, the basis would still be over $30,000 after three years and the gain would be correspondingly smaller. Only about $10,000 of gain would remain to recapture in that case. The total tax is not necessarily higher with bonus depreciation, since the earlier deductions also reduced ordinary income, but the timing shifts again. Zwick and Mahon (2017) found that firms value immediate cash flow highly, which suggests many owners will accept a later tax bill in exchange for earlier savings. That is a reasonable choice, but it should be made knowingly, with the expected holding period in mind. For an owner who expects to keep the equipment for its whole useful life, recapture is a minor concern; for one who replaces equipment every few years, it should be part of the decision.

Reply to Abigail

Abigail, you made an interesting point that making 100% bonus depreciation permanent may reduce its effect, because firms no longer have a reason to accelerate purchases before the incentive expires. House and Shapiro (2008) built their analysis around exactly that feature: a temporary incentive gives firms a strong reason to buy long-lived capital while the subsidy lasts, and they found a large investment response to the temporary bonus of the early 2000s. A permanent incentive removes that rush. Firms can no longer gain by moving next year's purchase into this year, so some of the investment that earlier studies measured, which was partly a shift in timing, would not appear. Still, the effect does not disappear. A permanent first-year deduction lowers the cost of capital for every future investment, which should raise the level of investment even if it does not concentrate purchases in a particular year. Zwick and Mahon (2017) also found that the response depended on whether the incentive generated immediate cash, which is true whether the rule is temporary or permanent. Your point is strongest for large firms that can plan purchases around tax deadlines. For small firms like the one in my thread, the main barrier is cash, and a permanent rule may actually help more because owners can plan around it without guessing whether Congress will extend it. Spilker et al. (2018) note that certainty is one of the standards of a good tax, and frequent changes to this rule have given taxpayers little of it. A permanent rule restores that certainty, and the evidence suggests small firms will respond to it.

References

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

House, C. L., & Shapiro, M. D. (2008). Temporary investment tax incentives: Theory with evidence from bonus depreciation. American Economic Review, 98(3), 737-768. https://doi.org/10.1257/aer.98.3.737

Spilker, B. C., Ayers, B. C., Barrick, J. A., Lewis, T. K., Robinson, J. R., Weaver, C. D., Worsham, R. G., & Outslay, E. (2018). Taxation of individuals and business entities (Custom ed.). McGraw-Hill Education.

Zwick, E., & Mahon, J. (2017). Tax policy and heterogeneous investment behavior. American Economic Review, 107(1), 217-248. https://doi.org/10.1257/aer.20140855