	Introduction

Under current tax law, firms may expense (or deduct as a current rather than a capital expense) up to $1 million of the total cost of new and used qualified assets they purchase and place in service in tax years beginning in 2018 under Section 179 of the federal tax code. They also have the option under Section 168(k) of expensing the entire cost of qualified assets they acquire and place in service between September 28, 2017, and December 31, 2022. P.L. 115-97 also increased the Section 168(k) bonus depreciation allowance to 100% of the cost of eligible assets acquired and placed in service from September 28, 2017, through the end of 2022 and made certain changes in the property eligible for the allowance. (See Table 1 for the annual expensing allowances from 1987 to 2018.) Limitations on Use of the Section 179 Allowance

Use of the allowance is subject to two limitations: an investment (or dollar) limitation and an income limitation. Qualified property with relatively long production times is allowed an extra year of bonus depreciation over this period. In an effort to stimulate more business investment in the midst of a severe economic downturn, Congress increased the allowance to $250,000 and the phaseout threshold to $800,000 for qualified assets bought and placed in service in 2008 in the Economic Stimulus Act of 2008 (ESA, P.L. The act also expanded the definition of qualified property to include qualified leasehold improvement property, qualified retail improvement property, and qualified restaurant property; in 2010 and 2011, a business could write off up to $250,000 of the annual cost of such property under Section 179. 115-97 ) in December 2017. Under the new tax law, the maximum expensing allowance rises to $1 million, and the phaseout threshold to $2.5 million, and both amounts are indexed for inflation starting in 2019. It also repeals the previous exclusion of property connected to lodging and indexes for inflation the $25,000 expensing limit for heavy-duty motor vehicles. 115-97 . As a result of unintentional language in the final bill, qualified improvement property is not eligible for the BDA until Congress amends the law to assign a 15-year recovery period to such property. Economic Effects of the Section 179 and Bonus Depreciation Allowances

Many lawmakers view the Section 179 expensing and bonus depreciation allowances as effective policy tools for promoting the growth of small firms and stimulating the economy during periods of slow or negative growth. As the most accelerated form of depreciation, expensing lowers this cost by reducing the tax burden on the discounted returns to an eligible investment. Second, spending on the assets eligible for the two expensing allowances tends to account for a relatively small slice of U.S. business investment. Given that the expensing allowance lowers the cost of capital and can boost the cash flow of firms claiming it, and that investment in many of the assets eligible for the allowance seems at least somewhat sensitive to changes in the cost of capital, it would be reasonable to conclude that the allowance may have caused domestic investment in those assets to be greater than it otherwise would have been. Under the reasonable assumption that the amount of capital in the economy is fixed in the short run, a tax subsidy like the allowance is likely to divert some capital away from relatively productive uses and into tax-favored ones. As a result, it seems fair to conclude that the allowance has no lasting effect on the distribution of after-tax incomes. Tax Administration

Yet another policy issue raised by the Section 179 and Section 168(k) expensing allowances concerns their impact on the cost of tax compliance for business taxpayers. P.L.
Expensing is the most accelerated form of depreciation. Section 179 of the Internal Revenue Code allows a taxpayer to expense (or deduct as a current rather than a capital expense) up to $1 million of the total cost of new and used qualified depreciable assets it buys and places in service in 2018, within certain limits. Firms unable to claim this allowance may recover the cost of qualified assets over longer periods, using the depreciation schedules from Sections 167 or 168. While the Section 179 expensing allowance is not expressly targeted at smaller firms, the limits on its use effectively tend to confine its benefits to such firms.
Section 168(k) allows taxpayers to expense 100% of the cost of qualified assets bought and placed in service between September 28, 2017, and December 31, 2022. There is considerable overlap between the property eligible for the Section 179 and Section 168(k) expensing allowances.
Since 2002, the two allowances have been used primarily as tax incentives for stimulating the U.S. economy. Several studies have assessed the economic effects of the 30% and 50% bonus depreciation allowances from 2002 to 2004 and from 2008 to 2010. Their findings suggested that accelerated depreciation did affect investment in qualified assets, but that it was a relatively ineffective tool for stimulating the U.S. economy during periods of weak or negative growth.
Available evidence also suggests that the expensing allowances have a moderate effect at best on the level and composition of business investment and its allocation among industries, the distribution of the federal tax burden among different income groups, and the cost of tax compliance for smaller firms. The allowances of course have advantages and disadvantages. On the one hand, an expensing allowance simplifies tax accounting, and a temporary allowance has the potential to stimulate increased business investment in favored assets in the short run by reducing the user cost of capital, increasing the cash flow of investing firms, and giving firms an incentive to make qualifying investments before the incentive expires. On the other hand, an expensing allowance is likely to interfere with an efficient allocation of capital among investment opportunities by diverting capital away from more productive uses with relatively low after-tax returns.
In December 2017, the House and the Senate agreed on a measure (H.R. 1, P.L. 115-97) to revise key parts of the federal tax code. The new tax law made significant changes to both Section 179 and Section 168(k).
In the case of the Section 179 expensing allowance, P.L. 115-97 permanently raised the maximum allowance to $1 million, and the phaseout threshold for the allowance to $2.5 million, beginning in 2018; it also indexed both amounts for inflation starting in 2019. The act also expanded the definition of qualified property to include qualified improvement property, specified improvements (e.g., new roofs and heating systems) to nonresidential real property, and property used in connection with lodging. In another change, the $25,000 expensing limit for heavy-duty sport utility vehicles imposed in 2003 was indexed for inflation starting in 2019.
In the case of the bonus depreciation allowance, P.L. 115-97 increased it to 100% for qualified property acquired and placed in service between September 28, 2017, and December 31, 2022; the allowance is scheduled to phase out to 0% starting in 2027. In addition, the placed-in-service deadlines for property with relatively long production periods and for noncommercial aircraft were set one year longer. The wording of the final bill led to the unintended result that qualified improvement property became ineligible for bonus depreciation, as it no longer had a 15-year recovery period. As things now stand, such property is treated as 39-year nonresidential real property, unless Congress alters the language.