Tax Policy Priorities: Bonus Depreciation & Interest Deductibility
The current administration and allied industry groups are pushing to restore pro-growth tax provisions, including 100% bonus depreciation and EBITDA-based interest deductions. These policies are seen as tools to stimulate investment, offset inflation, and strengthen manufacturing.
Bonus Depreciation
Bonus depreciation allows businesses to immediately deduct the full cost of eligible capital investments (like equipment, software, and qualified improvement property), rather than spreading it out over time.
Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was allowed through 2022.
This bonus rate began phasing out in 2023, decreasing by 20% per year, and is scheduled to fully phase out by 2027 (i.e., 0% rate).
In 2025, the bonus depreciation rate will be 40% under current law.
The Proposal
To support domestic production and manufacturing the administration proposes to restore 100% bonus depreciation, making it retroactive to January 20, 2025.
Economic Impact
Advocates argue 100% bonus depreciation:
- Stimulates investment and job creation.
- Is especially helpful during high inflation, as it preserves the real value of deductions.
Key Takeaway
Higher interest rates and inflation erode the value of your depreciation deductions. Cost segregation and bonus depreciation allow you to maximize their value through the identification of shorter recovery period assets that are often mixed up with longer life assets. You’ll expense your costs sooner, reducing the negative effects of inflation and missed investment opportunities.
Business Interest Expense Deduction
The 2017 Tax Cuts and Jobs Act initially permitted businesses to deduct interest expenses up to 30% of EBITDA.
However, in 2022, the calculation shifted to 30% of EBIT, excluding depreciation and amortization, thereby reducing the deductible amount.
The Argument
Reverting to the EBITDA-based calculation would encourage domestic manufacturing and investment by lowering the cost of debt financing.
By incorporating depreciation and amortization (the “DA” in EBITDA) into the calculation of interest deductibility limits, businesses could deduct a larger portion of their interest expenses, potentially leading to significant tax savings.
Key Takeaway
For taxpayers in capital intensive industries that do not qualify for the small business exception or the election out of the limitation for real property trades or businesses, the move back to EBITDA would allow for substantially higher interest expense deductions in tandem with the increased depreciation deductions generated by a cost segregation study.
Parting Thoughts
Interest rates and input costs have risen substantially and may be going higher given current trade policy (tariffs) and the macro environment (inflation). Taxpayers need to ensure they maximize the tax attributes of their capital investments. The reversion to EBITDA-based interest expense limits and 100% bonus depreciation would substantially improve the tax benefits of cost segregation studies.
