Frequently Asked Questions
Guidelines for Citing BEA Information | ID: 1002 | Created: Aug-05-2011
Over the past several years, several pieces of legislation authorized temporary accelerated depreciation and higher ceilings for small business expensing. For example, the Tax Cuts and Jobs Act of 2017 provides for full expensing of qualified investments placed in service after September 27, 2017 and before January 1, 2023. The Tax Cuts and Jobs Act also increases the Internal Revenue Code Section 179 expensing limitation from $500,000 to $1 million. The new legislation replaces provisions of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that provided for 50 percent bonus depreciation for qualified investments placed in service during 2015-2017, and also extended the Internal Revenue Code Section 179 expensing limitation. The PATH Act extended the earlier Tax Increase and Prevention Act of 2014 (or “TIPA”), which offered similar provisions for bonus depreciation and small business expensing for 2014./1
BEA’s estimates of profits from current production (“corporate profits with inventory valuation and capital consumption adjustments”) are not affected by these tax acts, because profits from current production do not depend on the depreciation-accounting practices used for Federal income tax purposes. BEA’s measure of profits from current production reflects economic accounting practices in which depreciation is based on an estimate of the reduction in the value of fixed capital used in the production process.
BEA begins with financial and tax based data when it derives its estimates of profits from current production. It then removes the effects of special tax provisions by the capital consumption adjustment (CCAdj). The CCAdj is the difference between the depreciation consistent with the tax code and the economic depreciation that underlies BEA’s measure of profits from current production.
BEA also publishes “profits before tax” and “profits after tax,” in which tax depreciation has not yet been adjusted to an economic accounting basis. Special tax provisions, such as “bonus” depreciation, increase the depreciation that corporations can claim and thus reduce profits before taxes by the same amount. The reduction in profits before tax leads to reductions in taxes on corporate income and profits after tax. To offset the effect of these provisions on profits from current production, BEA raises its estimate of CCAdj by the same amount. As a result, changes in profits on current production are not affected by the start of these provisions.
Similarly, when these provisions expire or diminish (as they did in the first quarter of 2012), the depreciation that corporations can claim for tax purposes is reduced. Because the deductible amount summed across these years and future tax years must be equal to the cost of the qualifying property, accelerated deductions in earlier years result in reduced deductions in future years. This reduction in allowed depreciation leads to increases in profits before tax, taxes on corporate income, and profits after tax, and an offsetting decrease in the CCAdj. The decrease in the CCAdj ensures that profits from current production are not impacted by the expiration of allowable depreciation from these tax provisions. Accordingly, changes in profits on current production that occur in quarters when the provisions expire are not affected by the expiration of these provisions./2
1. In 2014, the Tax Increase and Prevention Act (or “TIPA”) provided for 50 percent bonus depreciation for qualified investments placed in service during 2014 and raised the ceiling for small business expensing under Internal Revenue Code Section 179 to $500,000 through 2014. In addition to TIPA, other stimulus acts that affected tax-based depreciation include: the Job Creation and Worker Assistance Act of 2002 (see April 2002 Survey of Current Business), the Jobs and Growth Tax Relief Reconciliation Act of 2003 (see July 2003 Survey of Current Business), the Economic Stimulus Act of 2008 (see June 2008 Survey of Current Business), the Small Business Jobs and Credit Act of 2010, the American Taxpayer Relief Act of 2012 (or “ATRA”), and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (or “TRUIRJCA”) which allowed 100 percent bonus depreciation from September 2010 through December 2011 and 50 percent bonus depreciation in 2012.
2. For detailed data, see the table "Net effects of Changes in the Tax Treatment of Depreciation on Selected Measures of Corporate Profits". BEA estimates are based on data from the Office of Tax Analysis (OTA) of the Department of the Treasury and other source data. Detailed information about Treasury's bonus depreciation calculations is available in OTA's working paper entitled "Corporate Response to Accelerated Tax Depreciation: Bonus Depreciation for Tax Years 2002-2004".
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