The One Big Beautiful Bill Act (OBBBA) significantly updates how businesses handle depreciation. These changes aim to stimulate economic growth and investment. Among these provisions, the 100% bonus depreciation and increases to the Section 179 threshold stand out as key features designed to incentivize businesses to invest in capital assets.
What is 100% Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to immediately deduct a significant portion of the cost of eligible assets in the year they are placed in service, rather than spreading the deduction over the asset’s useful life. The 100% bonus depreciation provision allows businesses to deduct 100% of the cost of qualifying assets upfront.
Qualifying Property
Qualifying property includes assets used in a trade or business or to generate income and includes the following:
- Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or fewer
- Qualified improvement property (QIP) placed in service after 2015
- Computer software depreciable over three years
- Water utility property
- Qualified film, television show or theatrical production acquired and placed in service after 9/27/2017.
100% bonus depreciation is applicable to both new and used property after 9/27/2017.
Key Dates for Tax Planning
Eligibility for 100% bonus depreciation depends on both the acquisition date and the placed-in-service date of assets and buildings. Under prior law, bonus depreciation was set to phase down gradually, but the OBBBA reverses this trend early in 2025. The updated phase-down schedule is based on the following acquisition dates:
- 2022: 100% bonus depreciation
- 2023: 80% bonus depreciation
- 2024: 60% bonus depreciation
- January 1, 2025 – January 19, 2025: 40% bonus depreciation
- January 20, 2025 and beyond: 100% bonus depreciation
Various factors determine the acquisition date. Please consult your RKL advisor for further clarification, as this is a crucial component in determining eligibility.
Key Changes to Section 179 Under the OBBBA
The OBBBA updates Section 179 expensing for the 2025 tax year and beyond:
- Increased deduction limit: The maximum deduction under Section 179 has been doubled to $2.5 million, offering businesses a substantial opportunity to reduce taxable income. Prior to this change, the inflation-adjusted limit for 2025 was set at $1.25 million.
- Higher phase-out threshold: The phase-out threshold for Section 179 deductions has been increased to $4 million, up from the previous limit of $3.13 million. This means businesses can deduct up to $2.5 million until their equipment purchases exceed $4 million. The deduction phases out completely once purchases reach $6.5 million, providing a broader range for businesses to benefit from this incentive.
- Effective date: The updated limits apply to qualifying property placed into service in tax years beginning after December 31, 2024, ensuring businesses can take advantage of these changes starting in 2025.
- Permanent provision: One of the most impactful changes is the permanent inclusion of Section 179 expensing in the tax code. By removing the uncertainty of annual extensions, businesses can now rely on this provision as a consistent part of their long-term tax planning strategy.
Benefits of Permanent 100% Bonus Depreciation and Section 179
The restoration of permanent 100% bonus depreciation and increases to the Section 179 thresholds provide businesses with several advantages, including:
- Improved cash flow: Immediate expensing can significantly enhance a company’s cash flow, freeing up capital for further investment or operational needs.
- Tax savings: Businesses can benefit from substantial tax savings in the year of purchase, which can be particularly advantageous for companies with high taxable income.
- Improved return on investment (ROI): Boosts internal rate of return on capital projects by accelerating tax benefits.
Strategic Tax Planning Opportunities
The OBBBA introduces powerful tax incentives, with permanent 100% bonus depreciation and updates to Section 179 limits serving as a cornerstone for tax planning. These provisions provide a significant opportunity for businesses to enhance their investment capabilities and improve financial performance.
- Capital expenditure timing: Determining the optimal timeline for placing assets into service.
- Entity structure optimization: Assessing how entity structures can maximize tax benefits.
- Coordination with other tax credits: Understanding the interplay between bonus depreciation, Section 179 and other available incentives.
- Asset classifications: Strategically categorizing assets for maximum tax efficiency.
Consult your RKL tax advisor for further information and planning.
