Full expensing incentivizes investment in clean energy and infrastructure by reducing upfront costs and driving climate innovation without relying on targeted subsidies.

With the crafting of a reconciliation package in full swing, the fate of the Inflation Reduction Act (IRA) hangs in the balance. Much of the discussion in Washington has centered on what will happen to the energy tax credits. Defenders have called for a scalpel approach, while opponents want to sledgehammer the entire law. Little attention, however, is focused on what tax policy could replace the plethora of technology-specific credits. In a new paper, we outline how full expensing is a pro-growth, pro-environment policy that doesn’t pick winners and losers. 

Full expensing (also known as immediate expensing or bonus depreciation) allows businesses to immediately deduct the full cost of new investments from their taxable income, rather than spreading those deductions over multiple years. Although details differ between proposals, expensing includes equipment, research and development, and facilities. 

Under current law, when a company builds a wind farm or installs factory machinery, it must depreciate that asset over a prescribed schedule of multiple years. This delay means the company cannot recover the cost of the investment in the first year. That inflates its taxable profit higher than its actual cash profit. In effect, the tax code penalizes up-front investment by eroding the real value of deductions through inflation and time. It is a tax on income that does not exist.

A Proven Bipartisan Tool

Notably, Congress embraced expensing in various forms in recent years with bipartisan support. The 2017 Tax Cuts and Jobs Act (TCJA) enabled one hundred percent bonus depreciation for short-lived assets, which have recovery periods of less than twenty years, including most equipment and machinery purchases across all industries. However, bonus depreciation began declining by twenty percent each year starting in 2023. It will fully expire at the end of 2026. Under current law, companies may deduct forty percent of their investments in short-lived assets immediately and must spread the remaining costs out over several years. 

The TCJA also changed the treatment of research and development investment. For roughly seventy years, businesses could fully deduct basic and applied research and development expenses in the first year. The provision covered everything from the scientists and entrepreneurs conducting the research to the cost of equipment and facilities. It also included domestic and foreign research and development investments. That provision lapsed in 2022, meaning companies must amortize the expenses over five years, and for research occurring outside the country, expenses must be amortized over fifteen years. 

Leveling the Playing Field

Swapping energy tax subsidies for full expensing would level the playing field and simplify tax policy, treating all productive capital investments—whether a solar farm, a factory upgrade, or natural gas capture equipment—the same. Making immediate depreciation permanent also provides certainty for businesses and encourages investing in the United States. Critically, full expensing supports economic growth and environmental progress in several ways:

1. Full expensing makes investing in improved energy efficiency equipment and capital stock more attractive. A company with a large fleet of cars could invest in fuel-efficient vehicles. The same holds for newer and more efficient HVAC systems, lighting, insulation, or water heaters. 
2. Full expensing for research and development (R&D) lowers the cost of R&D efforts and accelerates innovation. This is true whether you are a global company, like Google or Meta, or an upstart experimenting in your garage. Full expensing has a disproportionate benefit on small companies because they spend larger shares of their budgets on research and development.
3. Full expensing makes pro-environmental investments, including mitigation equipment, more affordable by lowering costs. For example, full expensing of natural gas equipment could encourage companies to capture and utilize the methane they may have otherwise flared—or worse, vented—at the extraction site. Carbon capture, sequestration equipment, and recycling equipment have become more attractive, and immediate expensing would incentivize greater uptake.
4. Full expensing encourages additional economic activity in the United States, where production occurs in a cleaner environment than in more polluting economies. The United States has an environmental advantage in manufacturing and oil and natural gas production, including its efforts to reduce carbon dioxide emissions. Economic development in the United States improves livelihoods and has a lower impact on the environment than in other countries.
5. Full expensing will encourage pragmatic investments to upgrade existing energy infrastructure rather than investment decisions to procure more taxpayer-funded subsidies. For example, repowering occurs when a facility decommissions or refurbishes existing wind farms with new turbines. Immediate expensing offers a technology-neutral approach to reducing the capital costs of retrofitting and repowering, driven by returns on investment rather than relying on tax credits.

A Smarter Long-Term Policy

Continuing with a subsidy-driven approach may be well-intentioned, but it is fiscally expensive and distortionary. It fails to encourage entrepreneurs to serve real consumer needs. Swapping the IRA for a permanent policy of full expensing encourages all investment. Because of this, the removal of subsidies for clean energy will not cause a crash in that market. Instead, it moves the clean energy industry forward without favoritism or market disruption. 

Full expensing for capital investment is a proven, pro-growth policy that would simplify the tax system and supercharge private investment. It avoids the pitfalls of subsidies: no more negative power prices that pay people to waste energy, no more government picking technology winners, and no more open-ended liabilities on taxpayers’ dime.

Our proposal is not easy. It will require overcoming entrenched interests that currently collect the subsidies. However, today’s political environment seems well-suited for such a trade. The IRA’s rising costs have inspired a reconsideration of its prudence but not a jettisoning of environmental goals. Political tribes may fight over which groups get federal funds and support, but every American is interested in a clean and prosperous future. 

This piece is a condensed version of a new C3 report, Full Expensing is Pro-Growth, Pro-Environment Policy.

About the Authors: Nick Loris and Josh T. Smith

Nick Loris is the Executive Vice President of Policy at C3 Solutions. Loris studies and writes on topics related to energy and climate policies, including natural resource extraction, energy subsidies, nuclear energy, renewable power, energy efficiency, as well as the ways in which markets will improve the environment, reduce emissions, and better adapt to a changing climate.

Josh T. Smith is the energy policy lead at the Abundance Institute and a visiting fellow with C3 Solutions. His work is focused on creating energy abundance through energy innovation. Previously, he directed research programs for the Center for Growth and Opportunity at Utah State University.

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