Enhancing Cost Recovery: A Key to Boosting U.S. Investment and Economic Growth

Introduction

Investment is a pressing concern that has driven various administrations to propose policies aimed at spurring economic activity in the United States. From President Obama's American Recovery and Reinvestment Act to the bipartisan Infrastructure Investment and Jobs Act under Biden, every administration seems to recognize the essential role that capital investment plays in stimulating growth. Even the Trump administration's tariffs and the recent One Big Beautiful Bill Act of 2025 have been positioned as mechanisms to invigorate U.S. manufacturing—demonstrating a consensus that fostering investment is a shared priority. Central to these strategies is the concept of cost recovery, which pertains to how quickly companies can deduct their investment expenses from their taxable income. By allowing immediate deductions, policymakers aim to remove the barriers that delayed deductions impose, making it more feasible for businesses to take on capital projects. If you're working in finance or economics, it's clear: faster cost recovery can alter the landscape of investment viability, opening new avenues for growth where there previously were none. At the Tax Foundation, we've employed a macroeconomic model to examine the tangible effects of potential changes to this cost recovery policy. It's not just theoretical; our findings indicate that enhancing cost recovery can be one of the most effective pro-growth strategies available. We’ve concluded that full expensing—enabling immediate deduction of all investment costs—stands out as the most powerful policy option. What does this mean in practical terms? Let’s break it down. A projected 1.5% increase in long-run GDP, while significant at a national level, can feel abstract. However, on the ground, investment translates into real benefits like new jobs, improved factories, better wages, and enhanced community assets. These changes matter, as they reflect the cumulative impact of investment decisions made by countless individuals and organizations across the country. In this analysis, we’ll dissect 15 case studies to explore how modifications in cost recovery can shift investment decisions. By focusing on the internal rate of return (IRR) and five different cost recovery scenarios, we'll demonstrate that quicker cost recovery has the potential to convert marginal investments into viable projects. This isn’t just an academic exercise; it's about real economic opportunity. Before diving into these case studies, we’ll first discuss the economic significance of investment, the interplay between taxes and investment decisions, and the various types of investment along with their respective tax treatments. After setting the scene, we’ll introduce our findings, outline key results, and consider the broader policy implications of our work. With that framework in mind, let’s explore how changes in cost recovery can reshape investment dynamics across diverse industries.

The landscape of tax treatment for various types of structures has remained largely unchanged since significant revisions in the 1980s, with the most notable adjustment occurring in 1993 when the depreciable life of commercial structures was extended from 31.5 years to 39 years.^[8] In 2016, the House GOP's tax reform proposal aimed to implement full expensing across all capital investments, including structure investments. However, as the legislative process unfolded, expensing for structures was quickly sidelined, and the Tax Cuts and Jobs Act (TCJA) was ultimately passed with only slight alterations to the existing tax framework for structures.

Recent Developments: OBBBA's Impact

In a noteworthy shift, the OBBBA introduced a provision for full expensing, but only for a select group of structures identified as qualified production property.^[9] This targeted approach—termed manufacturing structures expensing—represents a meaningful enhancement in tax treatment for qualifying assets. Yet, the ambiguity surrounding which structures meet the criteria for this designation has led to administrative headaches. Compounding the issue is the temporary nature of the provision: to qualify, construction must commence between January 19, 2025, and January 1, 2029, with service commencement needed by January 1, 2031. This narrow window could significantly limit the overall beneficial impact on cost recovery that many anticipated.

R&D: New Rules and Their Implications

When it comes to research and development, companies enjoyed the advantage of full expensing for decades. However, the TCJA reversed this trend, instituting a requirement for R&D costs to be amortized over a five-year period for domestic investments and a staggering 15 years for international expenses starting in 2022. The OBBBA has since rolled back the amortization requirement for domestic R&D, reinstating full expensing, while maintaining the 15-year timeline for foreign investments. This split in treatment underscores a notable discrepancy that companies need to factor into their financial planning.

Tax Treatment at a Glance

	R&D	Equipment	Residential Structures	Nonresidential Structures
Tax Treatment	Domestic R&D costs can be fully expensed immediately.	Equipment qualifies for 100% bonus depreciation when it’s placed in service.	Residential structures must be depreciated over 27.5 years.	Nonresidential structures are depreciated over 39 years.
Notes or Exceptions	Foreign R&D expenses require 15-year amortization.	Certain equipment items are excluded from depreciation.	Applicable to rental housing.	Manufacturing structures can be expensed, but construction must begin between January 19, 2025, and January 1, 2029, with service commencing by January 1, 2031.

Understanding these tax implications is vital for anyone navigating capital investments. The interplay of expensing and depreciation policies doesn't just affect tax liabilities; it shapes investment viability across sectors. When assessing potential projects, you'll need to keep these evolving rules and timelines in mind to accurately forecast returns and investments.

Optimizing Tax Policies for Future Gains

The analysis of tax treatment variations under the OBBBA clearly highlights the potential for enhanced investment returns across various sectors. Simply put, adjusting how assets are expensed can yield significant improvements in internal rates of return (IRRs)—between 1 to 2 percentage points for many projects. What's the takeaway here? Well, for industries with long-lived assets, such as gas pipelines and manufacturing plants, the financial implications are particularly striking. These sectors could see even greater benefits if tax policies shift towards immediate expensing rather than prolonged capital recovery periods. Consider the impact on the new gas turbine factory compared to the aerospace parts factory expansion. This difference in IRR—2.11 percentage points for gas turbines versus 1.81 for aerospace—highlights how asset type and the duration of capital recovery can significantly alter investment appeal. The gas turbine case requires a larger upfront investment in structures, making it more sensitive to changes in tax policy. If you’re navigating investment decisions in energy or manufacturing, these tax nuances are worth serious consideration.

Looking Ahead: Challenges and Opportunities

The primary data from 15 varied case studies emphasizes the ongoing evolution of tax policy and its practical repercussions for businesses. The stark contrast in IRR averages before and after the OBBBA showcases a tangible improvement—an increase from approximately 11.74% to 12.62%. Despite the progress, there’s still a noticeable gap when compared to the scenario of full expensing for all assets, which suggests that further policy enhancements are necessary. It’s not fully clear how upcoming legislation might further refine these structures, but one thing is certain: businesses will need to remain vigilant. Closely monitoring further adjustments in tax policies could help firms optimize their investment strategies. For taxpayers invested in R&D and capital expenditures, staying ahead of these changes could mean the difference between mediocre growth and a substantial boost in profitability. If you’re in a position to influence policy or investment strategy, push for clearer, more favorable tax structures that will allow for more aggressive upfront expensing—this will not only facilitate current projects but will also lay a foundation for future growth.