Thanks to the One Big Beautiful Bill Act (OBBBA), 100 percent bonus depreciation has been restored and made permanent. And there’s more.
The Section 179 limits have been greatly expanded.
Plus, there is a brand-new, whopping 100 percent deduction for qualified production property.
100 Percent Bonus Depreciation
100 percent bonus depreciation is back for property acquired and placed in service January 20, 2025, and later.1
What’s more, the OBBBA has made it permanent 2. We’ve had 100 percent bonus depreciation before (during 2018-2022), but it was never permanent.
The bonus percentage was reduced to 80 percent for 2023 and 60 percent for 2024. The percentage was 40percent for 2025 until the OBBBA was passed. The 40 percent deduction now applies only to property acquired from January 1, 2025, through January 19, 2025 (although you can still use the 40 percent bonus for all of 2025 if you want to).
Permanent 100 percent bonus depreciation is a sea change in the tax law that makes bonus depreciation the go-to method for deducting personal and other property that qualifies.
You can use bonus depreciation to deduct any property you acquire by purchase from an unrelated party that has a depreciation period of 20 years or less—this includes all types of tangible personal business property and off-the-shelf software (but not custom software).
It also includes land improvements that have a 15-year depreciation period, such as landscaping, fences, and driveways.
You can also use bonus depreciation for “qualified improvement property”: non-structural interior improvements made to non-residential (e.g., commercial) buildings after they are placed in service.3
No Bonus Depreciation Allowed
Bonus depreciation cannot be used for:
- land;
- permanent structures attached to land;
- inventory;
- intangible property such as patents, copyrights, and trademarks; or
- property outside the United States.
Bonus Depreciation Limited
You can use bonus depreciation to deduct listed property only if you use the property for business at least 51 percent of the time.
Listed property notably includes passenger automobiles. There is an annual $8,000 limit on bonus depreciation for passenger automobiles.4 The total first-year deduction for passenger vehicles placed in service in 2025 is limited to $20,200 if bonus depreciation is claimed. The OBBBA did not increase these limits.
For vehicles whose gross unloaded weight is more than 6,000 pounds, there is no annual deduction limit. For trucks and vans, the 6,000-pound weight limit is based on gross loaded weight. Thus, if you drive such a vehicle 100 percent for business, you can deduct 100 percent of the cost in one year.
If you use bonus depreciation, you must use it for all assets that fall within the same class.
You may not pick and choose the assets for which you want to apply bonus depreciation within a class. For example, if you buy a car and take bonus depreciation, you must take bonus depreciation for any other property you buy that year within the same class. 5
Cars are five-year property, so you must take bonus depreciation that year for any other five-year property—for example, computers and office equipment.
Bonus Depreciation for Real Property Owners
100 percent bonus depreciation is a particular boon to owners of commercial real property and residential rental property.
Real property owners have long been allowed to use cost segregation to depreciate personal property and land improvements separately from the building itself. This speeds up depreciation because commercial real property has a 39-year depreciation period and residential real property has a 27.5 year period.
Personal property can be depreciated over five years and land improvements over 15 years.
Generally, to take advantage of the faster depreciation, you have to use cost segregation, which breaks the property into its various depreciation components.
The OBBBA supercharges cost segregation. With OBBBA’s bonus depreciation, you can deduct 100 percent of the cost of personal property and land improvements in commercial and residential rental property in a single year.
Typically, 20 percent to 30 percent of the value of such property (not counting the land) consists of personal property and land improvements. Cost segregation combined with 100 percent bonus depreciation can result in enormous first-year deductions for property owners.
Planning tip. If you need to hire an engineering firm to perform a cost segregation study to determine which elements of your property qualify for bonus depreciation, book them now because they’re going to be busy.
Section 179 Expensing Enhanced
The OBBBA also enhanced Section 179 expensing.
Starting in 2025, you can now deduct up to $2.5 million worth of property placed in service during the year—a massive increase over the $1,220,000 limit for 2024.
Section 179 expensing is phased out dollar-for-dollar if the amount of qualifying property you place into service during the year exceeds $4 million. If you place in service more than $6.5 million in property, Section 179 is completely phased out.
Section 179 may be used to deduct much the same property as bonus depreciation: that is, most types of tangible personal property, off-the-shelf computer software, and non-structural interior improvements to non-residential buildings after they are placed in service.
Unlike bonus depreciation, Section 179 expensing can also be used for certain exterior improvements to non-residential buildings after they’re placed in service, including roofs and HVAC systems.6
Which Is Better: Section 179 Expensing or Bonus Depreciation?
Section 179 will likely no longer be used much by most businesses because they can deduct 100 percent of the cost of the same property using bonus depreciation.
In addition to being subject to an annual cap, Section 179 has disadvantages that make it less desirable than 100 percent bonus depreciation. Here are four things to consider.
1. Recapture Issue
You can use Section 179 only for property you use over 50 percent of the time for business (this isn’t the case with bonus depreciation, except for listed property).
If your use of Section 179 property falls to 50 percent or below, you must give back your Section 179deduction through recapture. There is no such recapture with bonus depreciation, except for listed property, such as vehicles.7
2. Income Limitation
You can’t use Section 179 to deduct, in one year, more than your net taxable business income for that year(not counting the Section 179 deduction but including your and your spouse’s salaries and business income).
Amounts that are not deductible are carried forward to be deducted in future years.8
Thus, Section 179 may never result in a loss, whereas there is no such limitation on bonus depreciation. Of course, now that losses can no longer be carried back but only carried forward, this is not as important as it used to be.
3. Class-Wide Issue
Unlike bonus depreciation, Section 179 expensing doesn’t apply class-wide. You may pick and choose which assets you wish to deduct using Section 179 within the same asset class. This is a potential advantage.
With Section 179, you can choose to fully deduct some assets in one year and use regular depreciation to deduct the cost of other assets over five or seven years.
You can also use Section 179 expensing to partially deduct an asset and depreciate the remainder over time.
If you expect your income to increase, it could make sense to postpone some of your depreciation deductions to future years.
4. Automatic or Not
Unlike bonus depreciation, Section 179 deductions are not automatic. You must claim a Section 179 deduction on your tax return by completing IRS Form 4562, Part I.
New 100 Percent Deduction for Qualified Production Property
Here’s a big one.
The OBBBA establishes a brand-new 100 percent deduction for “qualified production property.”9 For manufacturing businesses, this could be the real sleeper in the OBBBA.
Businesses have never been allowed to deduct 100 percent of the cost of buildings or other real property in a single year.
Commercial structures like factories must be depreciated over 39 years. Now, thanks to the OBBBA, it is possible to deduct 100 percent of the cost of certain types of non-residential buildings in a single year. But this new deduction is only temporary—so if you want it, you will have to hop on it.
Qualified production property is10
- non-residential real property;
- used by the taxpayer as an integral part of a “qualified production activity;”
- located in the U.S. or its territories;
- originally used by the taxpayer (or meets specific exceptions for acquired property);
- constructed between January 20, 2025, and December 31, 2028; and
- placed in service before January 1, 2031.
A “qualified production activity” is the manufacturing, production, or refining of any tangible personal property created through agricultural or chemical production. There must be substantial transformation of the property comprising the final product.11 The IRS will promulgate regulations to define this more clearly.
Examples from past regulations include12
- converting wood pulp to paper,
- machining steel rods into bolts, and
- molding plastic pellets into auto parts.
This deduction is available for factories, refining halls, assembly lines, and other production facilities where a substantial transformation of a product occurs.
Qualified production property does not include the portion of any non-residential real property used for offices, administrative services, lodging, parking, sales, software development, or engineering activities. It also doesn’t include restaurants or other retail establishments where food or beverages are sold.13
When planning new construction or renovations, manufacturers should clearly separate in their architectural documentation areas that are eligible for the deduction from those that are not, such as office space.
Taxpayers can deduct, in one year, 100 percent of the cost of constructing new qualified production property, provided that construction begins after January 19, 2025, and ends before January 1, 2031, and that the property is placed in service before January 1, 2031. That’s only about five-and-a-half years to design and construct the property and get it up and running.14
Taxpayers can also deduct, in one year, 100 percent of the cost of purchasing existing (used) qualified production property if15
- it is acquired after January 19, 2025 and before January 1, 2029;
- it was not used in a qualified production activity during the period from January 1, 2021, through May 12, 2025;
- it was not used by the taxpayer before acquisition; and
- it is placed in service before January 1, 2031.
This means you can purchase and rehabilitate underused or vacant manufacturing properties for production use and still qualify for the deduction.
In short, it’s time to kick the rust off the rust belt.
This deduction is available only to taxpayers who use qualified production property themselves. You can’t take the deduction if you build a factory or another production facility and lease it for others to use.16
In addition, qualified production property must be used for a minimum of 10 years after it is placed into service. If it is used for less than 10 years, the qualified production property deduction will be recaptured—that is, you’ll have to pay tax on the amount deducted at ordinary income rates.17
Takeaways
The OBBBA restores and makes permanent 100 percent bonus depreciation for personal business property acquired and placed in service January 20, 2025, and later.
The OBBBA more than doubles the annual limit on Section 179 expensing to $2.5 million for 2025. The maximum $2.5 million deduction begins phasing out for businesses that place in service over $4 million in business property.
Since bonus depreciation and Section 179 expensing are used for much the same types of property, it is likely that you will use Section 179 much less for 2025 and later.
Bonus depreciation applies automatically to all qualifying property unless you elect out. When you elect out, you elect out of bonus depreciation for the entire class of assets. Section 179 expensing may be applied on an asset-by-asset basis.
The OBBBA establishes a brand-new, temporary 100 percent deduction for “qualified production property.” This is non-residential real property used to manufacture tangible products created through agricultural or chemical production.
The property must be constructed between January 20, 2025, and December 31, 2028, and placed in service before January 1, 2031. Existing qualified production property may also qualify for the deduction if it was not in service during January 1, 2021, through May 12, 2025
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