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line with the rest of the world on this issue. Similarly, the accelerated depreciation of machinery & equipment would become irrelevant due to the move toward taxation based on business cash flow and the immediate write-off of capital expenditures. Once the depreciation from legacy investments has run off, then depreciation should become irrelevant for tax purposes. We also highlight the deduction for US production activities (section 199) due to it being specifically highlighted by the Blueprint proposal as no longer being necessary under the new tax policies. Both the Blueprint and Trump have noted that they would likely maintain the Research & Development related tax credits.

Table 16: Top 25 US corporate tax breaks (2016)

Government tax expense
Category/Industry
2016 ($mn)
Deferral of income from controlled foreign corporations
International affairs
102,100
Accelerated depreciation of machinery & equipment
Commerce
28,570
Deferred taxes for financial firms on certain income earned overseas
International affairs
15,320
Deduction for US production activities
Commerce
12,080
Credit for increasing research activities
General science, space, and technology
9,580
Exclusion of interest on public purpose State & local bonds
General purpose fiscal assistance
8,400
Credit for low-income housing investments
Housing
8,200
Expensing of research & experimentation expenditures
General science, space, and technology
6,350
Deferral of gains from like-kind exchanges
Commerce
5,720
Inventory property sales source rules exception
International affairs
4,270
Graduated corporation income tax rate
Commerce
3,300
Exemption of credit union income
Financial institutions and insurance
2,310
Special ESOP rules
Income security
1,910
Deductibility of charitable contributions, other than education & health
Training, employment, and social services
1,720
Tax credit for orphan drug research
Health
1,700
Exclusion & deferral of policyholder income earned on life insurance & annuity contracts
Financial institutions and insurance
1,470
New markets tax credit
Community and regional development
1,260
Energy production credit
Energy
1,050
Exclusion of interest on hospital construction bonds
Health
1,010
Energy investment credit
Energy
890
Work opportunity tax credit
Training, employment, and social services
830
Deductibility of charitable contributions (education)
Education
820
Tax exemption of insurance income earned by tax-exempt organizations
Financial institutions and insurance
690
Exclusion of interest on bonds for private nonprofit educational facilities
Education
660
Special Blue Cross/Blue Shield tax benefits
Health
630
Source: BofAML US Equity & Quant Strategy, US Department of Treasury

Immediate capex expensing should provide some initial cash tax benefits
The shift to the immediate expensing of capital expenditures should provide a significant near-term reduction in cash taxes as companies benefit from the ongoing reduction of taxable income from the depreciation of legacy assets combined with the full expensing of new investments. As the depreciation of legacy assets rolls off, the tax benefit would become more modest. Keep in mind that, for tax reporting, many companies already take advantage of the accelerated depreciation schedules discussed above. The ongoing benefit of capex expensing derives from the deferral in the timing of tax payments.

Chart 16: S&P 500 capital expenditure to depreciation & amortization ratio
[Graph showing data trend from '86 to '16]
Capex/D&A
Avg.
Source: BofAML US Equity & Quant Strategy, S&P, Compustat

16 Equity Strategy Focus Point | 29 January 2017
Bank of America Merrill Lynch
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