Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
How Does Full Expensing Impact Businesses?
When businesses calculate their income for tax purposes, they subtract their costs. This makes sense because the corporate income tax is a tax on business profits, or, generally, revenues minus costs. However, businesses are not always allowed to subtract the amount they spend on capital investments, such as when businesses purchase equipment, machinery, and buildings. Typically, when businesses incur these sorts of costs, they must deduct them over several years according to preset depreciation schedules, instead of deducting them immediately in the year the investment occurs. Depreciation schedules are designed with the useful life of an investment in mind. If the typical industrial machine lasts for 15 years, then a business would deduct the costs for a similar machine over a 15-year period.
Full expensing allows for immediate deductions of capital costs in the year the expense occurs.
This is an appropriate treatment of business investment because costs should be immediately deductible when assets are bought. Higher costs lead to less capital and slower economic growth, whereas lower costs grow the economy—and with it the number of jobs and the level of wages. Investments that were previously not profitable can become profitable under full expensing, due to the reduction in the cost of capital.
Full expensing recognizes opportunity cost and the time value of money. It makes the tax code neutral toward investment, rather than discouraging it. Importantly, business investment will increase under full expensing, holding all else equal, because it lowers the cost of capital and removes the tax bias that discourages investment.
Full Expensing in the United States
As part of the 2017 Tax Cuts and Jobs Act (TCJA), lawmakers adopted temporary full expensing for short-lived assets. The policy allowed businesses to fully deduct the cost of their investments immediately rather than over the number of years prescribed by depreciation tables. The policy began phasing out in 2023 and was set to expire at the end of 2026, with proponents of a long-term stable policy of full expensing arguing for the policy to be made permanent.
With the passage of the One Big Beautiful Bill Act (OBBBA) in 2025, 100 percent bonus depreciation and domestic research and development (R&D) expensing were made permanent. Full expensing as a federal tax policy was restored permanently for investments made in the 2025 tax year.
The OBBBA also included a temporary 100 percent deduction for certain structures involved in tangible production. Structures typically must be depreciated over 27.5 or 39 years, reducing the real value of those deductions.
While full expensing for short-lived investment was made permanent federally, only some states fully conform to the new 100 percent bonus depreciation—some since before the passage of the OBBBA, with a few dating back to when expensing was temporarily permanent in the TCJA. Other states have chosen to decouple from this OBBBA provision.
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