Bonus Depreciation

Bonus Depreciation: 2025 and Beyond

Bonus depreciation allows businesses to take an immediate first-year deduction on the purchase of qualified business property, accelerating tax deductions that would otherwise be spread over years. This applies to property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS) — commonly called “short-life property.” Typical examples include machinery, equipment, computers, furniture, and eligible improvements to commercial real estate.

Permanent 100% Bonus Depreciation

The “One Big Beautiful Bill Act” (OBBA), signed on July 4, 2025, permanently reinstates 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. This means businesses can immediately expense the full cost of eligible assets, providing a major cash flow and tax planning advantage. The definition of qualifying property remains unchanged.

Eligibility Details

• Acquisition and placed-in-service dates are critical: Only property acquired and placed in service after January 19, 2025 qualifies for 100% bonus depreciation.
• Property acquired or under contract before January 20, 2025, but placed in service after, may be limited to 40% bonus depreciation.
• Eligible property includes tangible business assets with a recovery period of 20 years or less, qualified improvement property (QIP), computer software, water utility property, and more.

Qualified Improvement Property (QIP)

QIP (improvements to the interior of non-residential buildings) is eligible for 100% bonus depreciation under the new law, provided it does not:

• Enlarge the building,
• Affect elevators or escalators,
• Alter the internal structural framework.

Written Binding Contract Rule

If a binding contract for the acquisition of property existed prior to January 20, 2025, the property generally does not qualify for the new 100% bonus depreciation rate — even if placed in service later in 2025.

Section 179 Expensing: 2025 Update

Section 179 expensing lets small and mid-sized businesses immediately deduct up to $2,500,000 of qualifying property placed in service in 2025, with a phase-out cap at $3,130,000. These limits have increased from previous years.

• Section 179 typically covers tangible personal property (such as machinery, equipment, and certain off-the-shelf software) acquired for business use.
• It was expanded to include “qualified real property” (roofs, HVAC, fire/security systems, etc.) for nonresidential buildings.
• Section 179 deductions are phased out dollar-for-dollar above the cap, so large capital expenditures may limit its benefit.

Interplay: Section 179 vs. Bonus Depreciation

If both options apply, 100% bonus depreciation is usually more advantageous — there is no cap and it can be used by larger businesses. Section 179 is ideal for mid-sized businesses not exceeding the threshold, or those seeking to target specific real property items not eligible for bonus depreciation. Both deductions are subject to recapture for property sold or otherwise disposed of within a short time.

Key 2025 Provisions Summary

Historical Background

Bonus depreciation was developed after the September 11, 2001 terrorist attack. The federal government decided to encourage building using the bonus depreciation write-off of part of new building construction immediately in year one of the building’s useful life. The provision was initially enacted in the 2017 Tax Cuts and Jobs Act (TCJA) but was scheduled to phase out after 2026. The OBBA legislation makes full expensing permanent.

Practical Notes

• Cost segregation studies remain a powerful tool for identifying and accelerating deductions for assets qualifying for bonus depreciation.
• Large real estate investors and businesses making significant capital investments should take note of the placed-in-service and acquisition date rules for maximizing tax savings.
• Always consult a CPA or tax advisor for property placed in service near key legislative dates or when considering a sale within 3–5 years due to potential recapture.