Bonus Depreciation Updates Under OBBBA

Bonus Depreciation Under OBBBA: Permanent Full Expensing and a New Path for Production Property

The One Big Beautiful Bill Act (OBBBA) has enacted a significant change to the federal tax code, while also making permanent several items previously introduced in the Tax Cuts and Jobs Act– Bonus Depreciation included. Previously subject to a gradual phase-out under the Tax Cuts and Jobs Act (TCJA), full expensing for qualified property has now been made a permanent feature. This change carries major implications for business planning and capital investments.

This article will walk you through the changes to Bonus Depreciation, including the new production property bonus depreciation, and how it impacts planning for business owners.

What Is Bonus Depreciation?

Bonus depreciation allows businesses to immediately deduct a large portion (or all) of the cost of eligible business assets in the year they are placed in service. This upfront deduction reduces taxable income, which can enhance cash flow and support reinvestment. Eligible assets generally include new or used machinery, equipment, and certain qualified improvements. See the IRS’s FAQ on first year depreciation bonus.

What Has Changed Under OBBBA?

1. 1. Permanent 100% Expensing
      Under the revised §168(k)(1)(A), bonus depreciation is no longer subject to phase out limitations. Instead, businesses can permanently deduct 100% of the cost of qualifying property in the year it is placed in service.
   2. Simplification and Repeals
      Several provisions associated with the prior phase-down schedule, including §168(k)(6) and §168(k)(8), have been repealed. Definitions under §168(k)(2) were also streamlined to improve clarity.
   3. Expanded Eligibility for Specified Plants
      Largely impacting the agricultural industry, the previous rule limiting expensing of specified plants to those planted or grafted before January 1, 2027, has been removed. Now, all qualifying specified plants are eligible for full expensing, regardless of planting or grafting date.
   4. Transitional Election Available
      For the first tax year ending after January 19, 2025, a one-time transitional election allows taxpayers to choose a reduced bonus depreciation rate:
      • 40% for general qualified property
      • 60% for longer production period or certain aircraft property
      • 40% for specified plants
   5. Clarification for Long-Term Contracts
      A conforming amendment to §460(c)(6)(B) specifies that only property with a recovery period of seven years or less qualifies under long-term contract rules.

New Provision: Qualified Production Property Bonus Depreciation

In addition to making 100% bonus depreciation permanent, OBBBA introduces a new elective bonus depreciation rule under §168(n) for certain qualified real property used in production-related activities. This marks a notable expansion of full expensing into specific categories of nonresidential real estate.

Requirements for Qualification:

• • Must be nonresidential real property
  • Must be used as an integral part of a qualified production activity (e.g., manufacturing, refining)
  • Must be placed in service in the U.S. or a U.S. possession
  • Must be newly constructed, with construction beginning between January 20, 2025, and December 31, 2028 or have been used for non-manufacturing purpose between Jan. 1,  2021 and May 12, 2025.
  • Must be placed in service by December 31, 2030
  • Must be designated on the tax return as qualified production property

Additional Notes:

• • Original use must begin with the taxpayer (with exceptions for recently idle-use properties)
  • ADS (alternative depreciation system) property is not eligible
  • The election is binding and can only be revoked with IRS consent under extraordinary circumstances
  • Deduction is subject to recapture if the property is converted to a non-qualifying use within 10 years

Qualified Production Activity: To be eligible, the business activity must involve substantial transformation of tangible personal property. Activities like software development, research, lodging, and retail do not meet the criteria.

What Should Business Owners Do?

While much of these updates are extensions of provisions previously introduced in the Tax Cuts and Jobs Act, new changes and clarifications, especially the new production property bonus depreciation, could have significant impacts to businesses. Here is what business owners should do based on these changes:

• • Review Asset Strategy: Evaluate your capital expenditures to take advantage of permanent 100% expensing, particularly for assets with shorter recovery periods.
  • Plan for Transitional Year: Consider whether the reduced expensing election in 2025 offers a better financial strategy based on business needs and revenue forecasting.
  • Explore Real Property Opportunities: Businesses involved in qualified production should assess whether new facility construction between 2025 and 2028 could qualify under the new §168(n) provision.
  • Consult a Tax Advisor: The complexity of eligibility, elections, and long-term use considerations makes early planning essential. A professional can help you assess the financial impact and navigate compliance requirements.

Conclusion

The changes under OBBBA present an opportunity for businesses to optimize their tax strategy around capital investment. Understanding the scope and timing of these provisions is key to maximizing available deductions and planning effectively for the future.

If you would like to talk to a tax advisor to understand compliance and requirements, please connect with us online, or reach out to us directly at 1-770-495-9077 or email us at [email protected].

The above article only intends to provide general financial information and is based on open-source facts, it is not designed to provide specific advice or recommendations for any individual. It does not give personalized tax, financial, or other business and professional advice. Before taking any form of action, you should consult a financial professional who understands your particular situation. CKH Group will not be held liable for any harm/errors/claims arising from the articles. Whilst every effort has been taken to ensure the accuracy of the contents, we will not be held accountable for any changes that are beyond our control.