Here’s Why Corporate Taxes May Appear Lower After the OBBBA

Introduction

The One Big Beautiful Bill Act (OBBBA) fixed a big problem with the US business taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system. It removed disincentives to invest in machinery, equipment, and R&D by providing expensing. Expensing—or full and immediate deductions for investment—is the key driver behind Tax Foundation’s projection that the OBBBA will grow the economy in the long term.

Expensing allows firms to take larger upfront deductions to match the timing of their investments, which means taxable profits and corporate tax revenues will decline in the near term. In the next few years, corporate tax payments and effective tax rates may look low. This reflects how the new tax law changed the timing of business deductions, not a collapse of the corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.. A tax system that more accurately matches the timing of deductions with expenditures ensures that businesses face fewer barriers to investing in America.

The OBBBA’s Major Business Tax Changes

The OBBBA made four major changes to business income taxes:

100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco for short-lived investment, which was temporarily provided under the 2017 tax law but had been phasing out
Full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for domestic R&D, which was the norm until the 2017 tax law introduced amortization for R&D; the OBBBA includes options for small businesses to retroactively expense their R&D back to when amortization began (tax years beginning after 12/31/2021) or to accelerate remaining amortization deductions over a one- or two-year period
A less restrictive limitation on the net business interest deduction, reverting from EBIT to EBITDA
Temporary 100 percent expensing of qualified structures, allowing full deductions for investment in certain buildings if they are in a qualifying sector, constructed before the start of 2029 and placed in service before the start of 2031

To understand why these changes affect economic growth, tax revenues, and financial statements, it helps to understand how depreciation differs from expensing.

Why Expensing Matters for Investment

Depreciation requires a business to deduct the cost of its investment over time, determined by pre-set schedules in the tax code. For example, under tax code rules, a $100 investment in a five-year asset would be deducted over six years. At the end of the period, the deductions the business takes on its tax return will add up to $100 (see the dark yellow bars below), but because the deductions are taken over time, inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin and the time value of money erode their real value (see the light yellow bars below). In real, inflation-adjusted terms, the deductions do not add up to the full cost of the investment.

This brings us to the economic problem of basing the tax system on depreciation. Depreciation overstates a firm’s taxable profits, increasing its tax liability and cost of capital. This makes the tax system penalize the “normal return to investment,” or what a business needs to earn just to break even. In other words, depreciation makes the tax system discourage investments that would otherwise be worth pursuing.

The solution, which the OBBBA provided, is full expensing. Full expensing allows companies to align their tax deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but ot with what they really spend on capital or R&D investments, much like they already do for labor expenses or utility bills. Under this system, deductions are no longer understated, profits are no longer overstated, and the cost of capital is lower. Thus, the tax penalty on investment falls. This leads to more investment because, in the absence of the depreciation penalty, more investment opportunities are viable.

These incentives drive the long-run economic benefits we estimate arise from full expensing. Tax Foundation estimates that permanent expensing for short-lived investment and R&D in the OBBBA will boost long-run GDP by 0.7 percent by incentivizing new investment and thereby boosting productivity, wages, and employment as the capital stock grows. Temporary expensing for certain structures has no long-run effect because it expires partway through the decade, and the EBITDA-based interest deduction adds another 0.1 percent to long-run GDP.

Why Corporate Tax Revenues Fall Before They Mostly Recover

In terms of the fiscal effects, moving the tax system from depreciation deductions to full expensing has a short-term transitional cost for the federal budget.

In the near term, accelerating the ability to deduct investment costs will cause a temporary surge in total corporate tax deductions: businesses will continue to take their remaining depreciation deductions for investments already put in place, and on top of that, businesses will take full and immediate deductions for new investments they put in place. Allowing firms to accelerate their remaining R&D amortization deductions also temporarily increases corporate deductions. This surge in deductions causes a temporary decline in corporate tax revenues.

For example, we estimate the first-year cost of bonus depreciation is a $66.3 billion reduction in federal tax revenue compared to the baseline, but it falls to $21.5 billion by year 10. In other words, the revenue effect fades as older depreciation deductions are used up.

Table 1. Economic and Revenue Effects of the OBBBA’s Major Business Tax Changes

Source: Tax Foundation General Equilibrium Model, February 2026.

The chart below provides a hypothetical illustration of this transition. In the year of the switch, the combination of depreciation deductions and expensing deductions significantly decreases corporate tax revenues, but eventually, revenues will mostly recover as firms use all their old depreciation deductions.

The transition to expensing helps explain why near-term corporate receipts may decline even as the long-term tax base stabilizes. We estimate that even with the OBBBA’s changes, the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. remains broader than it was prior to the 2017 tax law.

To gauge the breadth of the corporate income tax base, we look at total corporate tax revenue collections in constant 2025 dollars per percentage point on the statutory corporate tax rate (that is, collections divided by 21, or 35 prior to the 2017 tax law). We compare the CBO baseline projections made prior to the OBBBA with Tax Foundation’s dynamic projections of corporate tax collections reflecting the OBBBA. Collections per point will decline initially from the OBBBA but recover over time.

For example, we estimate that in 2026, collections per point will decline from CBO’s pre-OBBBA baseline projection of $23 billion to $16 billion, but by 2035, it will be within $1 billion of the pre-OBBBA baseline projection.

Why Financial Statements May Look Unusual

Much of the public discussion about corporate taxes relies on financial statements. Understanding how accounting rules written by the Financial Accounting Standards Board (FASB) differ from tax rules written by Congress is essential to interpreting corporate tax headlines in the coming years.

In some years, differences in rules may lead a corporation to report low or no taxable profits on its tax return, while still reporting positive book profits on its financial statement, or vice versa. Many of those book-tax gaps even out over a longer horizon, meaning short-term snapshots can paint an inaccurate picture of corporate tax liability. That will be especially true in 2026. Corporations will be working under a new set of tax rules from Congress, plus new disclosure requirements from FASB. The resulting financial statement numbers will require careful interpretation, not hyperbole.

As businesses begin using the investment provisions from the OBBBA, they will take bigger tax deductions and have smaller tax bills due when they invest in machinery, equipment, software, R&D, or other qualifying assets in the United States. But accounting standards require firms to deduct just a portion of their investment expenses each year, leading to book-tax gaps.

New disclosure requirements may make interpretation even more confusing, as corporations now must report their cash income taxes paid for the year by jurisdiction. That may sound straightforward. However, cash tax payments reported for one year do not necessarily reflect a company’s tax liability for that year. Payments made in a certain year could reflect estimated quarterly payments for the current tax year, or they could reflect payments to true up tax liability from past years or refunds from past overpayments.

Companies will continue to report their current and deferred tax expense (or benefit), generally following accrual-based accounting. These numbers can be complicated to interpret as well. For example, the tax code limits how much tax liability can be offset by general business credits, including the R&D credit. If firms have made significant R&D investments, generating significant R&D tax credits, and they utilize the new tax law’s investment deductions, they may find their R&D credits limited. In that case, the firm would first be required to carry those credits back to offset past tax liability, but accounting rules would count that in the current year.

While taxable income and book income may sound similar, they are defined differently, and the gap between them will widen in the near term. Firms may appear highly profitable on their financial statements but may have little to no tax liability because the new law allows tax deductions to match the timing of investments. Taken together, the OBBBA’s major business provisions primarily change the timing of deductions. Near-term corporate tax payments may fall, and financial statement data may appear unusual, but over time, revenues will stabilize, book-tax gaps will fade, and the US tax code will incentivize domestic investment.