Did OBBBA change first year bonus depreciation rules?
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Yes, the One Big Beautiful Bill Act (OBBBA) made significant changes to first-year bonus depreciation rules under IRC §168(k):
1. Permanent 100% Bonus Depreciation
- Prior Law: Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was available for qualified property acquired and placed in service after September 27, 2017, but was scheduled to phase down to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% thereafter (except for certain long production period property and aircraft).
- OBBBA Change: OBBBA repealed the phase-down schedule and made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. This means businesses can immediately deduct the full cost of eligible property placed in service after that date, with no scheduled reduction in the bonus percentage.
2. Scope of Qualified Property
- Qualified property continues to include:
- Tangible property with a recovery period of 20 years or less under MACRS,
- Computer software (as defined in IRC §167(f)(1)),
- Water utility property,
- Qualified film, television, live theatrical productions, and (as of OBBBA) qualified sound recording productions,
- Specified plants (with certain rules for agricultural property).
- Used property remains eligible, provided it was not previously used by the taxpayer or a related party, and other anti-abuse rules are satisfied.
3. Transitional Election for 2025
- For property placed in service in the first taxable year ending after January 19, 2025, taxpayers may elect to use a reduced bonus depreciation rate of 40% (or 60% for certain long production period property and specified plants) instead of 100%.
4. Special Expensing for Manufacturing Structures
- OBBBA introduced a new IRC §168(n), allowing 100% expensing for certain nonresidential real property used in qualified production activities (e.g., manufacturing facilities), subject to specific requirements and timeframes. This is a new, temporary provision for structures, not previously eligible for bonus depreciation.
5. Other Key Points
- Exclusions: Property required to be depreciated under the alternative depreciation system (ADS), property used in regulated utilities, and property used in a trade or business with floor plan financing remain ineligible for bonus depreciation.
- Section 179 Expensing: OBBBA also increased the Section 179 expensing limit to $2.5 million (from $1 million), with a phase-out threshold of $4 million, both indexed for inflation.
6. State Tax Conformity
- Many states conform to federal bonus depreciation rules, so these changes may affect state taxable income unless a state decouples from the new federal provisions.
7. Effective Dates
- The permanent 100% bonus depreciation applies to property acquired after January 19, 2025.
- The new expensing for manufacturing structures applies to property for which construction begins after January 19, 2025, and is placed in service before January 1, 2031.
In summary: OBBBA made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025, eliminated the scheduled phase-down, and introduced a new, temporary 100% expensing provision for certain manufacturing structures. These changes are intended to provide long-term certainty and stronger investment incentives for businesses.
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