Business Use of Special Provisions for Accelerated Depreciation: Section 179 Expensing and Bonus Depreciation, 2002-2009

Abstract

This paper examines business use of special provisions for accelerated depreciation that have been passed into law over the past decade -- bonus depreciation and expanded Section 179 expensing limits. Tax data over the 2002-2009 period reveal that corporations, pass-through entities, and individual filers have tended to use Section 179 expensing in the 60 percent to 80 percent range, both in terms of the numbers of firms and relative to total allowed investment amounts. For bonus depreciation, in the years 2002-2004 and 2008-2009, the effective takeup rates were lower than observed for Section 179 expensing. The number of firms using bonus for eligible investment generally was in the 40 percent to 50 percent range, while the use of bonus depreciation relative to the amount of eligible investment generally was in the 50 percent to 60 percent range for C corporations and S corporations but was at lower rates of about 30 percent to 40 percent for partnerships and individuals. Probit analysis of C corporation data from 2008 is consistent with theoretical priors that bonus depreciation use is limited by firms in a loss position, and by firms with net operating loss carryforwards. The analysis also is consistent with a positive relationship between bonus use and conformity of state tax laws with Federal treatment regarding bonus depreciation; average equipment investment life; the size of the firm; and for manufacturing and mining firms relative to other industries.

Keywords: Investment, depreciation, tax policy

JEL Classification: E22, E62, H25