What changes to bonus depreciation have been introduced by the OBBBA?
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The One Big Beautiful Bill Act (OBBBA), enacted in 2025, introduces significant changes to bonus depreciation under the Internal Revenue Code, primarily by making 100% bonus depreciation permanent and expanding its application. Below is a comprehensive analysis of these changes, referencing the relevant statutory provisions and regulatory guidance.
1. Permanent Extension of 100% Bonus Depreciation
Prior Law:Under IRC §168(k), as amended by the Tax Cuts and Jobs Act (TCJA), businesses could claim a 100% first-year bonus depreciation deduction for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. This percentage was scheduled to phase down by 20 percentage points each year, reaching 0% after 2026 (with a one-year extension for certain longer production period property and aircraft).
OBBBA Change:The OBBBA eliminates the scheduled phase-out and makes 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. This means that for property acquired and placed in service after this date, taxpayers may immediately deduct the full cost of eligible property in the year it is placed in service, with no scheduled reduction in the bonus percentage.
- Transition Rule: For property placed in service during the first taxable year ending after January 19, 2025, taxpayers may elect to apply a reduced bonus depreciation percentage (40% or 60%) depending on the property category, but otherwise, 100% applies going forward.
2. Scope of Qualified Property
Qualified Property Includes:- MACRS property with a recovery period of 20 years or less (e.g., machinery, equipment, certain improvements).- Computer software as defined in IRC §167(f)(1).- Water utility property.- Qualified film, television, and live theatrical productions (if acquired before initial release or performance).- Specified plants (if the taxpayer elects).
Used Property:The OBBBA, consistent with the TCJA, allows bonus depreciation for both new and used property, provided the taxpayer did not previously use the property and did not acquire it from a related party or in a carryover basis transaction.
Exclusions:Bonus depreciation is not available for:- Property required to be depreciated under the alternative depreciation system (ADS), such as property used predominantly outside the U.S., tax-exempt use property, or property used in certain real property trades or businesses that elect out of the interest deduction limitation.- Property used in a regulated utility trade or business or in a trade or business with floor plan financing indebtedness, if the related interest is deducted under IRC §163(j).
3. New 100% Expensing for Qualified Production Property (QPP)
OBBBA introduces a new elective 100% bonus depreciation for "qualified production property" (QPP) under IRC §168(n):- QPP is defined as the portion of any nonresidential real property used as an integral part of a qualified production activity (manufacturing, production, or refining of tangible personal property, requiring substantial transformation).- The property must be placed in service in the U.S. or its possessions, with original use commencing with the taxpayer.- Construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031.- Leased property and property used for offices, administration, lodging, parking, sales, research, software development, or engineering are excluded.- A recapture provision applies if the property ceases to be used in qualified production within 10 years.
4. Section 179 Expensing Limit Increased
- The maximum amount a taxpayer may expense under IRC §179 is increased to $2.5 million, with the phase-out threshold increased to $4 million, both indexed for inflation for tax years beginning after December 31, 2025.
5. Other Notable Provisions
- Coordination with Other Provisions: The OBBBA clarifies that using ADS for purposes of other code sections (e.g., for GILTI or FDII calculations) does not disqualify property from bonus depreciation, unless ADS is otherwise required.
- Section 743(b) Adjustments: Bonus depreciation is available for partnership basis adjustments under IRC §743(b), provided the transferee partner did not previously have a depreciable interest in the property.
- Qualified Improvement Property (QIP): QIP remains eligible for 100% bonus depreciation as 15-year property, provided it is not required to be depreciated under ADS and is not used in an excluded trade or business.
6. Effective Dates
- The permanent 100% bonus depreciation applies to property acquired after January 19, 2025, and placed in service after that date.
- The new QPP expensing applies to property placed in service after July 4, 2025, with construction beginning after January 19, 2025.
7. Policy and Planning Implications
- The permanent extension of 100% bonus depreciation is intended to encourage domestic investment by allowing immediate expensing of capital expenditures, improving after-tax cash flow and reducing the cost of capital for U.S. businesses.
- The new QPP provision further incentivizes U.S. manufacturing and production facility investment by allowing immediate expensing of qualifying real property, a significant expansion from prior law.
8. Summary Table of Key Changes
9. Caveats and Considerations
- State Conformity: Not all states conform to federal bonus depreciation rules; state tax impact should be separately analyzed.
- Recapture: For QPP, recapture applies if the property ceases to be used in qualified production within 10 years.
- Exclusions: Property required to use ADS, property used in certain trades or businesses, and property acquired from related parties or in carryover basis transactions remain ineligible.
In summary: The OBBBA makes 100% bonus depreciation a permanent feature of the U.S. tax code for qualified property acquired after January 19, 2025, and introduces a new 100% expensing provision for certain manufacturing-related real property. These changes are designed to stimulate domestic investment by allowing immediate deduction of capital expenditures, with important exclusions and compliance requirements remaining in place.
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