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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 highlignted 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) 2016 Government tax expense Category/Industry ($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 4270 Graduated corporation income tax rate Commerce 3,300 Exemption of credit union income Financial institutions and insurance 2,310 Special ESOP rules Income security 910 Deductibility of charitable contributions, other than education & health Training, employment, and social services 1,720 Tax credit for orphan drug research Health {00 Exclusion & deferral of policyholder income earned on life insurance & annuity contracts Financial institutions and insurance AT0 New markets tax credit Community and regional development ,260 Energy production credit Energy ,050 Exclusion of interest on hospital construction bonds Health ,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 ‘86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '99 '00 ‘01 '02 03 '04 05 '06 '07 '08 ‘09 '10 12 13 '14 15 16 a——CapexD&A —Avg. Source: BofAML US Equity & Quant Strategy, S&P, Compustat BankofAmerica <2” 16 Equity Strategy Focus Point | 29 January 2017 Merrill Lynch HOUSE_OVERSIGHT_023084