Cost Recovery for New Corporate Investments in 2012
One of the most important debates in American tax policy concerns the proper treatment of capital expenses. Over the past few years, several members of Congress have proposed sweeping changes to how businesses are allowed to deduct the cost of capital expenditures, including Dave Camp, Max Baucus, and Devin Nunes. In general, businesses are allowed to deduct expenses in the year that they occur. However, special rules apply to capital expenses, such as the cost of machines and buildings. Rather than deducting capital expenses immediately, businesses are required to spread out deductions for capital expenses over time periods ranging from three to 50 years, according to a set of depreciation schedules.
The current system of depreciation discourages businesses from making capital investments, by denying them a full deduction for these expenses. Because businesses and people value money in the present more than money in the future, a deduction spread out over many years is worth less than one taken immediately. So, requiring businesses to deduct their capital expenditures over long periods of time is equivalent to granting businesses only a partial deduction for their investments, in present value terms. Overall, U.S. corporations will only be able to deduct 87.14 percent of the value of investments made in 2012 over time. Many economists argue that a system of full cost recovery would be maximally efficient. However, the current U.S. tax code requires corporations to deduct investments over time periods ranging up to 50 years, leading to limited cost recovery.