Adam N. Michel
Over the last few weeks, a wave of headlines has painted a similar story: the One Big Beautiful Bill Act (OBBBA) has handed corporate America a massive cash windfall. The Wall Street Journal says the “cash windfall from Trump’s tax law is starting to show up.” The Washington Post highlights the $16 billion firms are projected to save this year, and the New York Times has run multiple pieces suggesting the tax law is a giveaway to the wealthy and large firms. This framing echoes an argument Senator Elizabeth Warren made in a recent letter to the Joint Committee on Taxation (JCT).
Each of these articles tells a version of the same story: companies will pay less tax this year, due to the OBBBA’s reinstatement of full expensing, a policy that lets businesses immediately deduct the cost of new investments (machines, equipment, technology) rather than writing those costs off slowly over many years. This isn’t a new loophole or special break. It simply recognizes that investment is an upfront cost and allows firms to deduct it when they actually incur the expense.
Expensing in OBBBA
The OBBBA changes how the tax code treats investment by restoring and expanding expensing (also called 100 percent bonus depreciation) across three major categories. First, it permanently reinstates immediate expensing for domestic R&D expenditures, reversing the post-2021 shift to mandatory write-offs over a five-year period. Small businesses can retroactively expense R&D costs incurred since 2021, and larger firms can accelerate remaining deductions over a period of one to two years.
Second, the bill permanently restores expensing for short-lived assets, with a useful life of 20 years or less, such as equipment and machinery. This reinstated the full deduction for eligible property acquired after January 19, 2025, that was in the process of phasing out under the 2017 tax law. Third, the OBBBA temporarily expands expensing to include qualifying structures, allowing firms to fully deduct the cost of new buildings if construction begins after January 19, 2025, and before 2029, and the property is placed in service before 2031.
The retroactive R&D provisions (allowing immediate deductions for investments made before 2025) will inevitably function as windfalls for firms that made decisions under the old rules. You can’t change behavior in the past. These pre-2025 allowances account for roughly 6 percent of the three expensing provisions’ 10-year revenue reduction.
The $16 billion cost of extending 100 percent bonus depreciation retroactively into January of 2025 was a sensible adjustment, with much smaller windfall potential because the policy was announced before the law was passed. Tax writers wanted to avoid encouraging firms to delay investment until after the law’s enactment, and the president previewed the expensing changes in the spring State of the Union address to Congress. Lawmakers made a similar choice in 2017, extending full deductions retroactively three months before the bill was signed into law.
Critics Misunderstand the Lumpiness of Business Income
A key misunderstanding in the general critique of expensing as simply a corporate giveaway is the idea that temporary dips in business tax liability prove the policy is excessive. But business expenses, especially for longer-term investments, are inherently uneven. Firms incur significant upfront costs to build new factories, purchase equipment, and expand their operations. Those costs show up immediately, while the revenue from those investments accrues slowly, often years later, and sometimes not at all (when an investment doesn’t pay off after a bad bet).
A well-designed tax system should reflect this reality. We want firms to deduct their actual costs when they incur them. We don’t want unprofitable firms paying taxes simply because the tax code’s timing rules force them to act as if they have earned income they haven’t yet generated. Without full expensing, this is exactly what happens.
The inevitable consequence of aligning tax deductions with when actual expenditures are made is that tax liabilities will be lower in the short run and higher in the long run. That pattern is not a bug; it is the system working properly. Over the life of the investment, expensing does not reduce the total amount of deductions the firm can claim. It simply removes the artificial upfront penalty created by time, inflation, and long depreciation schedules that force firms to deduct costs over many years, often decades.
Expensing is the Most Pro-Growth Provision in the Bill
Permanent full expensing for new investment is not a corporate giveaway. Allowing firms to deduct the full cost of investment immediately prevents the tax code from penalizing those decisions. We now have a deep empirical record showing the economic effectiveness of expensing policies. Based on this literature, the Tax Foundation finds that expensing is consistently the most pro-growth tax cut when measured as GDP growth per dollar of revenue reduction. Here is a sample of the literature:
- Cowx, Lester, & Nessa (2024): The loss of full expensing for R&D in 2022 led to a decline in R&D investment and employment among affected firms.
- Curtis, Garrett, Ohrn, Roberts & Suárez Serrato (2021): Bonus depreciation between 2001 and 2011 increased relative investment flows by 15.8 percent and employment by 9.5 percent at manufacturing plants that benefited from the policy.
- Garrett, Ohrn & Suárez Serrato (2020): Increasing a location’s exposure to expensing increased employment by 2.1 percent on average.
- Zwick & Mahon (2017): Using variation in expensing rules from 2001–2004 and 2008–2010, eligible investment rose by between 10.4 percent and 16.9 percent, with the strongest response among small and cash-constrained firms.
- Maffini, Xing & Devereux (2019): UK firms qualifying for accelerated deductions increased investment by between 2.1 percentage points and 2.5 points relative to nonqualifying firms.
All of these results, and many more, point in the same direction: making business investments more expensive through longer depreciation requirements leads to less investment. Full expensing corrects this cost-increasing distortion caused by the normal income tax system’s long write-off periods. Expensing is not a loophole; it is the baseline treatment economists have argued in favor of for decades because it reduces the tax penalty on new productive capital.
As the OBBBA’s economic effects continue to show up in the real economy, more headlines will highlight how businesses benefit from the law. In this case, those benefits are the mechanism by which the law supports American jobs, wage growth, and a more dynamic economy. The gains do not stop at the firm’s balance sheet; they flow through to American workers and the broader economy.
More reading on expensing:
- Expensing and the Taxation of Capital Investment
- Expensing Could Help Manufacturing’s Productivity Problem
- Treating Business Costs Correctly in the Tax Code
- Expensing Is Key in Any Pro‐Growth Tax Package