The 2017 Tax Cuts and Jobs Act (TCJA) saved small businesses thousands of dollars in tax deductions that were initially scheduled to be phased out over time. 100% bonus depreciation is one of those. Fortunately, the One Big Beautiful Bill Act (OBBBA), passed on July 4th, 2025, restored that deduction and opened the door for more progressive tax planning.
For business owners who have been watching this valuable deduction disappear year by year, this represents a massive opportunity. Here are the key takeaways you need to understand:
- 100% bonus depreciation is now permanent for qualified property placed in service after January 19, 2025.
- The phase-out schedule, which reduced benefits to 60% in 2024 and 40% in 2025, has been eliminated.
- Businesses can immediately deduct the full cost of qualifying equipment, vehicles, and other assets.
- New provisions also allow 100% expensing for certain domestic manufacturing facilities.
Permanent reinstatement of 100% bonus depreciation is a game-changer for businesses of all sizes.
Smaller companies will be able to immediately deduct new systems and hardware that could facilitate growth. Manufacturing firms can invest in new machinery and equipment without worrying about absorbing the full tax hit for a capital expense.
This is significantly different from the scheduled phase-out under the Tax Cuts and Jobs Act. Without the recent change, the bonus depreciation rates would have been 40% in 2025, 20% in 2026, and 0% in 2027 and beyond. That created some uncertainty. The new rules in the OBBBA are permanent changes that help businesses plan major capital investments with confidence.
What equipment qualifies for 100% bonus depreciation?
The qualification rule for the OBBBA is largely the same as the original TCJA guidelines. It defines qualified property as “tangible personal property” with a recovery period of twenty years or less. It also includes certain real estate improvement properties. Under the former rules, these were all subject to the scale-down schedule of the TCJA.
Eligible Property Categories
Manufacturing equipment and machinery, office furniture, computers, and vehicles used for business purposes are all eligible property for bonus depreciation. These are classified as “tangible” assets that have a recovery period of twenty years or less. Software purchases are also eligible, but only if the software has a useful life of less than one year.
Property Requirements
The new rules apply to equipment purchased and put into use after January 19, 2025, and used primarily for business purposes. The IRS definition for this is “first placed in a condition or state of readiness and availability for a specifically assigned function.” An example of this is computer hardware. It must be installed and operating before the business can take the deduction.
Revolutionary Addition: Qualified Production Property
An allowance for a 100% bonus depreciation on “qualified production property” is a new addition that was not included in the TCJA. This applies to construction projects started after December 31, 2024. They must be part of a production activity and located in the United States. With this rule, domestic manufacturers could conceivably write off entire factory buildings.
Timing matters now more than ever.
The new law has simplified the timeline, but parts of the phase-out are still in effect for businesses that haven’t filed their 2024 returns. For instance, only 60% of the purchase price for qualifying equipment purchased in 2024 can be deducted, whereas any qualifying equipment or property purchased and put into service after January 19, 2025, is 100% deductible.
Unfortunately, this change has caused some frustration within the business community. In December 2024, companies may have rushed to get equipment into service because the phase-down schedule would have cut depreciation to 40% in 2025. A few months later, in 2025, purchases once again receive 100% depreciation. Thankfully, that won’t change again.
Permanently removing the phase-down schedule provides a level of certainty that was previously lacking for business owners. They now have better opportunities to make timely purchases rather than being on a rushed schedule to take advantage of depreciation rules. This helps business owners plan more sensible long-term capital investment strategies.
Let’s look at an example of how to calculate tax savings from 100% bonus depreciation.
The financial impact of 100% bonus depreciation is significant. Imagine a manufacturing company making a $500,000 purchase for new equipment. If the sale takes place after January 19, 2025, and the equipment is placed into operation this year, the company can deduct the entire purchase price. If the tax rate is 25%, that’s a savings of $125,000.
Under the old phase-out schedule in the TCJA, only 40% of the purchase price would be deductible this year. The other 60%, which adds up to $300,000, is taxable. At 25%, that’s an additional $75,000 owed at the end of the year. Numbers like that can severely impact the profitability of small businesses, potentially offsetting any revenue growth that could occur.
Consider the cash flow implications of this. Furniture, equipment, and land improvements are all on the 100% depreciation list. Not having to pay tax on those assets frees up cash flow to be used elsewhere. Can you think of what you might do with that? It could facilitate additional growth, be placed in an investment account, or kept in reserve for emergencies.
How do we adjust strategic planning for the new tax environment?
Cost Segregation Studies: More Valuable Than Ever
The primary tool used to calculate depreciation in the United States is the Modified Accelerated Cost Recovery System (MACRS). It determines how much of an asset’s purchase price is deductible over a specific period. The new law directly affects that, so expect to see impactful changes when you do a cost segregation study. Here’s an example:
A $4 million warehouse purchase in 2025 might, through a cost segregation study, allocate $800,000 to five- and 15-year property. Under the old scheduled phase-down, $411,000 of the five- and 15-year property (at a 40% rate) would have been deductible in the first year. Now, as a result of the change, the entire $800,000 can be written off immediately.
Enhanced Section 179 Benefits
The OBBBA also increases the limits and thresholds on expensing qualified property under IRC Section 179. The annual limit for immediate expensing has been increased from $1.25 million to $2.5 million. The threshold for phasing down the limit has been raised to $4 million. Call my office if you need a better explanation of that. I’d be happy to take the time to go over it.
Manufacturing Facility Opportunities
Capital-intensive organizations, particularly in the manufacturing industry, have been given a special depreciation allowance for “qualified production property.” It applies to any property placed into service before 2031. This creates unprecedented opportunities for manufacturers investing in domestic production equipment, tools, and fixtures.
Remember to factor in state tax considerations, documentation requirements, and entity structure into your planning.
State Tax Implications
Don’t assume that changes on the federal tax level will trickle down to your state department of revenue. Not all states conform to federal bonus depreciation rules. Business owners should verify whether their state recognizes the enhanced federal benefits and, if so, whether any adjustments are required on their state tax returns. Your accountant can help you with this.
Documentation Requirements
Don’t expect the IRS to take your word for it. They require proper record-keeping that shows the acquisition dates, placement-in-service dates, business-use percentages, and compliance with all qualification requirements. This is even more critical with higher deduction amounts and mixed-use properties, such as vehicles used for both personal and business purposes.
Entity Structure Optimization
These new tax breaks can decrease your tax liability at a corporate level, but may not be useful if you’re filing as an LLC or S-Corp with a pass-through income. This is a good time to review that. If you’re already a C-Corp, please check with my office to determine how this could impact capital expenditure timing decisions and strategic asset classifications. We can also review your entity structure.
Integrate depreciation with other new tax advantages.
Research and Development Expensing
Domestic research and development are now expensible under the OBBBA. It also permanently reinstates elective expensing for qualifying domestic research and experimental expenditures. The only requirement is that the payments occur after December 31, 2024. This creates additional opportunities for technology companies and manufacturers.
Business Interest Deduction Improvements
The cap on business interest expense was 30% of adjusted taxable income (ATI) in 2024. This year, that could be significantly higher. The new law requires the use of a financial accounting concept similar to EBITDA when calculating your total business interest expense deduction. This change supports capital-intensive businesses that typically carry significant debt loads.
Act now for maximum tax savings.
Your business could benefit from these latest tax changes, but you won’t know that until you start doing the math on your tax filing. In the meantime, review your capital investment plans. They may have been adjusted to account for the previous phase-down rules. Consider a cost-segregation study to reevaluate those decisions.
The changes in the OBBBA are extensive and could affect your company in several ways. As a CPA, I’ve studied the new law extensively and can offer some assistance in helping you understand it better. My team can also set up a cost-segregation study and review your capital expenditure plans. There are opportunities there. Let’s explore them together.
Schedule a discovery call today to get started.
Talk soon,
Jeremy A. Johnson, CPA