Frequently Asked Questions

Guidelines for Citing BEA Information | ID: 491 | Created: May-29-2008
Answer

How does the Economic Stimulus Act of 2008 impact NIPA Corporate Profits?

Beginning with the first quarter of 2008, estimates of NIPA corporate profits reflect bonus depreciation provisions and higher ceilings for small business expensing provided by the Economic Stimulus Act of 2008 that the President signed into law on February 13, 2008. The law provides for a first-year bonus depreciation of 50 percent for qualifying property purchased and put in place in 2008. The law also raises the ceiling for small business expensing under Internal Revenue Code Section 179 from $128,000 to $250,000. Because the deductible amount summed across 2008 and future tax years is equal to the cost of the qualifying property, the accelerated deductions in 2008 result in reduced deductions in future years.

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) were not affected by the Act, because they do not depend on the depreciation-accounting practices used for Federal income tax purposes; this measure of profits reflects depreciation that is based on an estimate of the reduction in the value of fixed capital used in the production process. Because the Act reduced tax liability, profits after tax with inventory valuation and capital consumption adjustments were raised $37.8 billion.

Based on preliminary estimates, the Act's provisions increased the depreciation that corporations could claim in the first quarter of 2008 by $139.7 billion and, thus, reduced profits before taxes (PBT) by the same amount. (PBT is based on the inventory and depreciation-accounting practices used for Federal corporate income tax returns.) As a result, profits tax liability was reduced $37.8 billion, and profits after tax was reduced $102.0 billion.

The capital consumption adjustment (CCAdj) is the difference between the depreciation consistent with the tax code and the depreciation underlying profits from current production. It represents the adjustment to book profits needed to put them on an economic accounting basis. Because tax based depreciation estimates were raised $139.7 billion, the CCAdj was increased by the same amount.

Historically, similar adjustments were made for the Job Creation and Worker Assistance Act of 2002 (see April 2002 Survey of Current Business) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (see July 2003 Survey of Current Business). Therefore, the effects are net of offsetting bonus depreciation that was claimed in earlier years. For detailed data, see the table "Net Effects of the Tax Acts of 2002, 2003, and 2008 on Selected Measures of Corporate Profits" found at http://www.bea.gov/national/xls/technote_tax_acts.xls. 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". This paper can be found at: http://www.treas.gov/offices/tax-policy/library/ota98.pdf.

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