In the dynamic world of business, strategic tax planning can significantly impact your bottom line. The recent "One Big Beautiful Bill Act" (OBBBA) has brought about some truly transformative updates to depreciation rules, offering unprecedented opportunities for businesses to accelerate their cost recovery and boost their cash flow.
The OBBBA introduces three significant provisions that every business owner, from burgeoning startups to established enterprises, should understand: the permanent reinstatement of 100% bonus depreciation, increased Section 179 expensing limits, and a brand new 100% depreciation election for qualified production real property. These changes are designed to incentivize investment, stimulate economic growth, and provide immediate tax relief.
1. Bonus Depreciation Made Permanent at 100% (The Return of "100% Expensing")
For years, businesses have enjoyed the benefits of bonus depreciation, which allowed for an accelerated write-off of qualified property. However, this benefit was always subject to a looming "phase-down" schedule, gradually decreasing the applicable rate until it reached zero. The uncertainty surrounding its future made long-term capital expenditure planning challenging.
The OBBBA permanently sets bonus depreciation at 100% for qualified property acquired after January 19, 2025. This means that businesses can now confidently expense the full cost of eligible assets in the year they are placed in service. This is a monumental shift, providing immediate and substantial tax deductions that can significantly improve cash flow and reduce taxable income.
The types of property eligible for this accelerated depreciation generally remain the same as under prior law. This typically includes new and used tangible personal property with a recovery period of 20 years or less, such as machinery, equipment, vehicles, and qualified improvement property (certain improvements to nonresidential real property).
For property acquired before January 20, 2025, and placed in service after that date, a limited transitional election allows taxpayers to apply the pre-OBBBA phase-down rates (40% for property placed in service between January 1, 2025, and January 19, 2025, and 60% for property placed in service in 2024). Careful documentation of "placed in service" dates will be crucial for maximizing this benefit.
The permanence of 100% bonus depreciation provides a powerful, predictable incentive for businesses to invest in essential assets, fostering modernization and efficiency.
2. Increased Section 179 Expensing Limits: Greater Flexibility for Businesses
Section 179 allows businesses to deduct the full purchase price of qualifying equipment and off-the-shelf software placed into service during the tax year, rather than depreciating the asset over a period of years. While similar in effect to bonus depreciation, Section 179 has its own distinct rules and limitations.
The OBBBA dramatically increases the statutory expensing limit and the phase-down threshold for Section 179:
- Expensing Limit: The annual statutory limit for immediate expensing has been increased from the pre-OBBBA inflation-adjusted $1,250,000 (for 2025 property) to $2,500,000.
- Phase-Down Threshold: The threshold at which the expensing limit begins to phase down dollar-for-dollar has been raised from the pre-OBBBA inflation-adjusted $3,130,000 (for 2025 property) to $4,000,000.
Both of these new statutory amounts will continue to be adjusted for inflation in future years.
These increased limits offer substantial benefits, particularly for small and medium-sized businesses. A higher expensing limit means more of equipment and software purchases can be immediately deducted, improving cash flow. The raised phase-down threshold allows larger investments before the Section 179 benefit begins to diminish, making it accessible to a broader range of businesses.
This provision is effective for property placed in service in tax years beginning after December 31, 2024.
3. New 100% Depreciation Election for Qualified Production Property (QPP): A Boon for Manufacturers
The OBBBA introduces a 100% depreciation deduction for "qualified production property" (QPP) in the year it is placed in service. This is a significant development, as it extends immediate expensing to certain types of real property, which traditionally are depreciated over much longer periods.
What is QPP? QPP generally refers to nonresidential real property used as an integral part of a qualified production activity (QPA). A QPA is specifically defined as the manufacturing, agricultural production, or chemical refining of a "qualified product." A qualified product, in turn, is tangible personal property, excluding food or beverages prepared and sold in the same building as a retail outlet.
Key Requirements for QPP: QPP construction must generally begin between January 20, 2025, and December 31, 2029. The property must be placed in service in the U.S. (or a U.S. possession) before January 1, 2031. QPP is subject to an original use requirement, though exceptions exist for certain previously unused property not acquired from a related party or in non-recognition transactions.
- Exclusions: Importantly, QPP does not include property used for functions unrelated to QPAs, such as offices for sales or research activities, Alternative Depreciation System (ADS) property, or property the taxpayer leases to another person.
- Recapture: A 10-year recapture period applies. If QPP ceases to be used for a QPA within this period, Section 1245 recapture rules apply as if there had been a disposition of the property.
This elective 100% depreciation for QPP offers an incredible advantage for qualifying manufacturers and producers, allowing for the immediate recovery of substantial real estate investments and providing a powerful incentive for domestic production and infrastructure development.
Charting Your Course with Confidence
These recent changes to depreciation rules represent a significant opportunity for businesses to optimize their tax strategies and accelerate investment. However, the intricacies of each provision, including specific eligibility criteria, coordination rules, and effective dates, necessitate careful analysis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
