Economic activity, which reflects the balance between buying and selling assets, can be manipulated. In times of recession, with decreased economic activity, the government usually attempts to increase demand. For example, the Federal Reserve boosts economic activity, by reducing interest rates, in times of recession. Similarly, Congress can improve the economy, when it experiences a recession, by altering the tax regime and increasing capital investment. However, with the 2018 enactment of the Tax Cuts and Jobs Act (TCJA), Congress implemented aggressive depreciation provisions, which are no longer available to combat a forthcoming recession.
The TCJA drastically increased the amount that may be taken as a depreciation deduction. Specifically, under the TCJA’s modifications to the Internal Revenue Code (IRC) §179, an expensing provision, some taxpayers can deduct the cost of certain property, up to $1,000,000, doubling the previously-allowed amount. The TCJA also significantly increased the amount available for bonus depreciation, addressed in IRC §168. The new bonus depreciation provisions allow all eligible property to be fully expensed in the year it is purchased, a 50% increase from pre-TCJA law. Importantly, because these provisions are currently in use, they will not be available to combat economic decline if it occurs next year.
Many experts fear the next recession will occur by the end of 2020, while the TCJA’s generous depreciation provisions remain in effect. According to a recent study, more than 80% of the Chief Financial Officers in the United States expect a recession to begin by the end of next year. Executives cite emerging weaknesses in important sectors, like agriculture, automobile production, and other manufacturing as signs of a coming economic downturn. Experts have also noted stock market fluctuation and global trade wars as further indicators of coming economic woes. Along with the emergence of many recession bellwethers, the TCJA reduced tax revenues by $230 billion, artificially extending market growth, a further sign of coming economic hardship.
When the TCJA implemented immediate expensing, the tax code lost a tool to combat the recession expected in 2020. Usually, immediate expensing boosts economic growth. For example, former President Barack Obama signed legislation that allowed immediate expensing from 2010 to 2012, which helped end the long period of economic stagnation that began in 2008. Additionally, some experts believe the TCJA’s immediate expensing may produce a capital investment “hangover” in late 2022 or 2023, exacerbating the expected economic decline. To make the outlook worse, it is unlikely the TCJA was germane to recent financial success.
In addition to expending recession-fighting resources, the TCJA’s expensing provisions are not expected to boost the current economy, which is experiencing growth. According to Morgan Stanley, the TCJA’s depreciation rules will have little, if any, impact on today’s market. Other corporate executives have echoed the sentiment espoused by Morgan Stanley, stating depreciation provisions will create only marginal growth. By failing to provide a boost to the economy, and harming a coming fight against recession, the TCJA’s provisions may prove to be costly.
Dylan Ray is a third-year law student at Wake Forest. Before law school, Dylan attended Appalachian State, where he studied political science. After completing his education, he hopes to practice tax law.