Authored by Richard Staniszewski | Tax Manager & Sarah Reeves | Senior Tax Manager
Among the provisions recently passed under the One Big Beautiful Bill Act (OBBBA), several are specifically meant to promote business activity and incentivize capital investments, offering potentially significant benefits to businesses.
Key Takeaways:
100% bonus depreciation for qualified property is permanently reinstated.
A new temporary 100% deduction is provided for qualified production property (QPP).
The Section 179 annual expensing limit is increased to $2.5 million.
Read on to learn how businesses can take advantage of these incentives and plan strategically for the years ahead.
Reinstatement of 100% Bonus Depreciation
Many businesses benefited from 100% expensing of capital investments through bonus depreciation until it began to gradually phase down starting in 2022. While some businesses could still achieve 100% expensing using Section 179, there are several differences (such as the capital investment limit or taxable income limit on Section 179) that made bonus depreciation more advantageous for certain taxpayers.
Pre-OBBBA Bonus Depreciation:
Prior to the OBBBA, the Tax Cuts and Jobs Act (TCJA) established bonus depreciation for qualified property at 100% through 2022 with a 20% phasedown in each subsequent year until expiring at the end of 2026. This meant the bonus depreciation deduction for 2025 would have been limited to only 40% under TCJA rules.
Post-OBBBA Bonus Depreciation:
The OBBBA permanently reinstates the 100% bonus depreciation deduction for qualified property acquired and placed in service after January 19, 2025. For property placed in service between January 1 and January 19, 2025, the bonus depreciation deduction is still subject to the TCJA limit of 40%. Businesses can also elect for this transition year to apply the 40% for the entire first taxable year ending after January 19, 2025.
With the reinstatement of 100% bonus depreciation, businesses can now optimize their accelerated depreciation method by leveraging both the 100% bonus and 100% Section 179 expensing options for their fixed asset purchases.
Temporary 100% Deduction for Qualified Production Property
The Act also created a new temporary deduction to encourage investment in U.S. manufacturing by expanding 100% depreciation to certain non-residential real property (i.e. buildings) used in manufacturing.
Pre-OBBBA Depreciation of Manufacturing Property:
Before the passing of the OBBBA, there were few, if any, available ways to accelerate deductions for real property, aside from qualified improvement property. One of the limitations of 100% bonus depreciation is that the property must have a recovery period of 20 years or less to qualify. Nonresidential buildings and structures permanently attached to it typically have a recovery period of 39 years and are therefore not eligible for 100% bonus depreciation. As a result, businesses such as manufacturers and production companies were limited in their ability to accelerate deductions and free up capital for reinvestment.
Post-OBBBA Depreciation Incentive for Manufacturers:
The OBBBA established a new temporary deduction for qualified production property (QPP), allowing 100% bonus depreciation on such property at the election of the taxpayer. QPP is any nonresidential real property that is used as an integral part in the manufacturing of tangible personal property in the U.S. As nonresidential real property is typically depreciated over 39 years, this provides a significant acceleration. To qualify for this new deduction, certain requirements must be met:
- The property must be used as an integral part of a qualified production activity.
- The QPP must be placed in service in the United States.
- The original use of the QPP must commence with the taxpayer.
- Construction must begin after January 19, 2025, and before January 1, 2029.
- The QPP must be placed in service before January 1, 2031.
Manufacturers should be aware that the entire property is likely not eligible for the special 100% deduction. The portion of the property used for offices, administrative services, sales activities, research activities, parking, or other activities not related to manufacturing are not considered QPP and therefore do not qualify for this deduction.
This new deduction, when paired with the reinstatement of 100% bonus depreciation, may give certain taxpayers the potential to immediately deduct a significant portion of their investment in a facility the year it is placed in service.
Increase in Section 179 Expensing
Section 179 is an accelerated depreciation expense method that many businesses use to deduct 100% of their qualifying capital expenditures in the year incurred. The OBBBA permanently expanded the annual dollar limit amounts, allowing more businesses to take advantage of this acceleration option.
Pre-OBBBA Section 179 Expense Limit:
The Section 179 expense limit was set to be $1,250,000 in 2025 with a phase-down in the deduction starting once the total investment exceeded $3,130,000.
Post-OBBBA Section 179 Expense Limit:
The OBBBA permanently increased the annual Section 179 expense limit to $2,500,000 with a phase-down starting at $4,000,000 investment. This higher threshold is in effect for property placed in service in tax years beginning after December 31, 2024, and will be indexed for inflation in future years.
Take Advantage of Potential Tax Benefits
Businesses should review their capital expenditures and evaluate how these favorable changes to depreciation impact their taxable income forecasts. Companies with significant capital investments may also want to consider tax planning strategies, such as a cost segregation study, which is now even more beneficial given the enhanced changes to expensing capital improvements.
If you would like to speak to a tax professional about how the depreciation changes affect your business and discuss opportunities to maximize tax planning, contact our team today.
