July 2025

The ‘Big Beautiful Bill’ has been passed and signed into law; much of the media coverage has focused on topics like the SALT deduction cap and renewable energy tax credits. While these provisions are significant for individual taxpayers and renewable energy companies, they are unlikely to dramatically affect corporate cash flows for oil and gas, mining, and processing industries. One aspect of the bill, however, could have major ramifications for capital-intensive industries: the treatment of depreciation under the federal tax code.

 

We teach two key rules to simplify the complex world of tax deductions:

1. If you spend a dollar in a business, you get a dollar’s worth of deductions either immediately or in the future.

2. For every dollar spent, you save approximately 25 cents in taxes, assuming a combined federal and state effective tax rate of 25%.

 

These rules underscore a crucial insight: to maximize after-tax cash flow (and therefore net present value (NPV)), we want to take deductions as early as possible. The time value of money means that a deduction taken in year five is worth far less than a deduction taken today. For instance, at a 15% discount rate, a $1 deduction received in year five is worth only about 50% of its face value today - approximately 12 cents.

 

One of the most consequential elements in the Big Beautiful Bill for capital investment projects is the extension of 100% bonus depreciation. Most recently extended in the 2017 Tax Cuts and Jobs Act, bonus depreciation allowed businesses to deduct the full cost of qualifying new capital expenditures in the year the asset was placed into service.  We believe that the extension of bonus depreciation had a substantial role in boosting the economy after 2018 and beyond, as it significantly improved the after-tax return on capital projects.  This provision has been phasing out since its introduction, but is now permanent in the tax code moving forward. 

 

Comparing Two Depreciation Models

To illustrate the real-world impact of bonus depreciation, consider a simplified project model with five years of increasing revenues and operating costs. Let’s examine the following two models:

• Model 1: MACRS 5-Year Depreciation with Half-Year Convention

• Model 2: 100% Bonus Depreciation in Year 1

 

In both models:

• Revenue increases annually from $80 million to $96 million.

• Operating costs increase from $30 million to $38 million.

• The combined federal and state tax rate is 25%.

• Depreciation deductions are the only difference.

 

Model 1: 5-Year MACRS with Half-Year Convention

This is the standard MACRS depreciation method. Deductions are spread over six years using IRS MACRS percentages, as shown below:

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Model 2: 100% Bonus Depreciation

Here, the full $100 million depreciation is taken in Year 1, dramatically shifting the tax deduction forward. This leads to a higher present value of tax savings, as shown below:

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When comparing cumulative net income and cumulative after-tax cash flow, both models arrive at the same total of $127.5M. This confirms that the models are balanced.  Capital costs and depreciation add-backs cancel out, leaving the same cumulative net income and cumulative ATCF, but the timing of the tax deductions makes a substantial difference in present value terms.

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This article serves as a reminder that bonus depreciation isn’t just a small change; it’s a vital tool for improving project economics. For projects with significant capital outlays, the impact on ROR and NPV can be transformative.

Of course, every company’s tax situation is unique, and it’s essential to consult your internal tax team for specific advice, particularly around eligibility for bonus depreciation and Section 179 deductions that may be available for used equipment and smaller purchases.

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We are always working to stay up-to-date on current legislation in order to best help you learn how tax changes could impact your project evaluations.

 

By: Andrew Pederson