In Summary
- The One Big Beautiful Bill (OBBBA) permanently restores 100% bonus depreciation for qualifying business property placed in service on or after January 19, 2025, allowing businesses to deduct the full cost of eligible assets in the year they are put into service.
- The restored 100% bonus depreciation applies to both new and used property (if new to the taxpayer), has no income limitations or dollar caps, and can be used to generate or increase a net operating loss, unlike the Section 179 deduction.
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The rules for bonus depreciation have changed again. The One Big Beautiful Bill (OBBBA) restores 100% bonus depreciation for qualifying business property placed in service on or after January 19, 2025. Businesses can now deduct the full cost of eligible assets in the year the property is placed in service, rather than depreciating them over time. This update applies to tangible personal property with a recovery period of 20 years or less. Examples include machinery, equipment, vehicles, and other items used in day-to-day operations. For businesses that make regular capital purchases, the ability to take the entire deduction up front may reduce taxable income and improve cash flow. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Background and Prior Law
Bonus depreciation has been available in some form since 2002, when it was introduced as a temporary stimulus provision. At the time, it allowed businesses to deduct a portion of the cost of new qualifying property in the year it was placed in service, rather than depreciating the full cost over time. Over the years, the rules have changed several times, usually around the deduction rate or definition of eligible property. The provision has even been completely phased out multiple times.
Bonus depreciation has always applied to tangible personal property with a MACRS recovery period of 20 years or less. This includes equipment, machinery, office furniture, certain vehicles, and land improvements. Property must be used in a trade or business or for income-producing purposes to qualify. Assets held for personal use do not qualify.
A major expansion came with the Tax Cuts and Jobs Act (TCJA) of 2017. That law increased the bonus depreciation rate to 100% and it applied to both new and used property. These rules applied to assets placed in service through the end of 2022. After that, the deduction was scheduled to phase out gradually until it disappeared completely in 2027.
What Changes Under OBBBA
The new law reverses the phase-down and makes 100% bonus depreciation a permanent part of the tax code. If it had not been changed, bonus depreciation would have been 40% for 2025, 20% for 2026, and discontinued for 2027. Instead, beginning January 19, 2025, businesses can once again deduct the full cost of qualifying property in the year it is placed in service. The change applies to a wide range of tangible assets, including machinery, equipment, and certain vehicles, as well as to qualified improvement property.
In addition to restoring the full deduction, the law keeps the broader eligibility rules in place. Businesses can continue to claim bonus depreciation on both new and used property, as long as the asset is new to the taxpayer. There are no income limitations or dollar caps, which makes this provision especially valuable for large purchases and capital-intensive operations.
Strategic Planning Considerations
The new rules are retroactive to January 19, 2025. Any qualifying property placed in service on or after that date may now be eligible for the full deduction. For assets placed in service earlier in the year, bonus depreciation may still apply, but at a lower rate.
Bonus depreciation may also be used in combination with Section 179. While both allow for accelerated deductions, they are structured differently. In 2025, Section 179 is limited to $2.5 million, with the deduction beginning to phase out once total eligible purchases exceed $4 million. It also cannot create a net operating loss. Bonus depreciation has no cap and may be used to generate or increase a loss that can be carried forward. Depending on the situation, combining both provisions may offer a more favorable tax outcome.
It is also important to consider the long-term effects of front-loading depreciation. Taking a full deduction in the year of purchase may improve short-term cash flow, but it reduces future deductions. This can affect taxable income projections, financial reporting, and loan agreements. For commercial real estate acquisitions or improvements, a cost segregation study can help identify components with shorter recovery periods that may qualify for bonus depreciation.
Industries that make regular capital investments are likely to see the most benefit. This includes construction, manufacturing, logistics, agriculture, and technology. Businesses in these sectors should take time to review purchase timing, asset classification, and available tax strategies before the year-end.
Contact Us
Bonus depreciation continues to offer an important tax planning opportunity, particularly for businesses making capital investments. It’s important to review the rules and keep accurate documentation if planning to claim this important tax savings opportunity. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.