Favorable Business Depreciation Tax Changes under New Law

There's good news for businesses considering buying equipment and other capital assets: The One Big Beautiful Bill Act (OBBBA) dramatically improves first-year depreciation tax breaks. Here's what you need to know to take advantage.

100% First-Year Bonus Depreciation Is Back

The OBBBA permanently restores 100% first-year bonus depreciation for eligible assets acquired and placed in service after January 19, 2025. Before the OBBBA, for 2025, you could claim only 40% first-year bonus depreciation for most eligible assets.  

100% bonus depreciation was last allowed for eligible assets placed in service in 2022, but the deduction percentage was generally reduced in stages to:

• 80% for 2023,
• 60% for 2024, and
• 40% for eligible assets placed in service between January 1, 2025, and January 19, 2025.

For certain assets with longer production periods, these percentage cutbacks were delayed by one year. For example, a 60% first-year bonus depreciation rate applies to long-production-period property placed in service between January 1, 2025, and January 19, 2025.

Which Assets Are Eligible for First-Year Bonus Depreciation?

Eligible assets for first-year bonus depreciation include most depreciable personal property. Examples include:

• Equipment,
• Computer hardware and peripherals,
• Certain vehicles, and
• Commercially available software.

First-year bonus depreciation can also be claimed for real estate qualified improvement property (QIP). QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the date the building was placed in service. However, expenditures attributable to the enlargement of a building, elevators or escalators, or a building's internal structural framework don't count as QIP and usually must be depreciated over 39 years.

Important: Another key provision of the law now extends the 100% bonus depreciation privilege to qualified production property. (See "New Break for QPP under OBBBA" below.)

If you operate your business as a C corporation, there's no limit on the cost of eligible assets that you can deduct in the first year under 100% first-year bonus depreciation. For instance, suppose your calendar-tax-year corporation acquires and places in service $10 million of eligible assets after January 19, 2025, and before December 31, 2025. You can write off the entire cost on the corporation's 2025 federal income tax return thanks to 100% first-year bonus depreciation. If the write-off causes a net operating loss (NOL) for the year, the NOL can be carried forward indefinitely to offset the corporation's taxable income in future years.  

Beware of the Excess Business Loss Rule

Although there's no limit on the cost of eligible assets for which you can claim 100% first-year bonus depreciation, individual taxpayers who claim this tax break may inadvertently trigger the excess business loss rule. This potential pitfall may apply if you operate your business as any of the following entities:

• A sole proprietorship,
• A single-member limited liability company (LLC) that's treated as a sole proprietorship for tax purposes,
• A partnership,
• An LLC that's treated as a partnership for tax purposes, or
• An S corporation.

The excess business loss rule can affect individual taxpayers who have losses passed through to them from the types of businesses listed above. For 2025, an excess business loss is the excess of an individual taxpayer's aggregate business losses over $313,000 ($626,000 for a married joint filer). You can't deduct an excess business loss in the current year. Any excess business loss is carried over to the following tax year and can then be deducted under the rules for NOL carryforwards.

As a result, an individual taxpayer's 100% first-year bonus depreciation deduction can effectively be limited by the excess business loss rule.  

Sec. 179 First-Year Depreciation Rules Are Liberalized

For eligible assets placed in service in taxable years beginning in 2025, under the OBBBA, a business taxpayer can potentially write off up to $2.5 million with the Section 179 deduction. Before the new law, the scheduled maximum amount for 2025 was only $1.25 million.

However, a phaseout rule reduces the maximum annual Sec. 179 deduction if the taxpayer places more than $4 million of eligible assets in service during the year. Before the new law, the scheduled Sec. 179 phaseout threshold for 2025 was $3.13 million.

The increased Sec. 179 figures will be adjusted annually for inflation for taxable years beginning in 2026 and beyond.

Which Assets Are Eligible for Sec. 179 Expensing?

Eligible assets for Sec. 179 deductions include most depreciable personal property, such as:

• Equipment,
• Computer hardware and peripherals,
• Certain vehicles, and
• Commercially available software.

Sec. 179 deductions can also be claimed for real estate QIP, roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. Additionally, Sec. 179 deductions can be claimed for depreciable personal property used predominantly in connection with furnishing lodging.

Be Mindful of Additional Sec. 179 Limitations

Beyond the annual limitation on Sec. 179 deductions and the phaseout rule, there are two additional restrictions on Sec. 179 expense deductions:

1. Business income limitation. Allowable Sec. 179 deductions can't cause the taxpayer to have negative business income. If that happens, the excess Sec. 179 deduction is carried forward to future years.

For this purpose, business income means the taxpayer's aggregate taxable income derived from the active conduct of all businesses. For an individual taxpayer, business income includes:

• Wages, salaries, tips and other compensation,
• The taxpayer's share of proprietorship, partnership, LLC or S corporation net income (or loss),
• Section 1231 gains (or losses) from selling business assets,
• Depreciation recapture income from selling depreciable business assets, and
• Interest earned from business working capital.

If you actively participate in a rental property, you may be able to count the net rental income. However, you can't count hobby income. If you file joint returns with your spouse, count both your business income and your spouse's business income (if any).

If you own an interest in a partnership, an LLC that's treated as a partnership for tax purposes or an S corporation, things can become complicated, because the Sec. 179 deduction limitations apply at both the entity level and your personal level. Contact your tax advisor for more information.

2. Heavy SUV limitation. There's a special limitation on Sec. 179 deductions for heavy SUVs used over 50% for business. The tax code defines heavy SUVs as those with gross vehicle weight ratings between 6,001 and 14,000 pounds. For tax years beginning in 2025, the maximum Sec. 179 deduction for a heavy SUV is $31,300.

Tax Planning Considerations for First-Year Depreciation Breaks

Sec. 179 deductions are subject to several limitations that don't apply to 100% first-year bonus depreciation. So, under the OBBBA, you should generally claim 100% first-year bonus depreciation to the extent allowed rather than claiming Sec. 179 deductions for the same assets.

Contact your Porte Brown tax advisor for more information about these expanded tax incentives. He or she can help you plan for the current tax year and advise you on whether tax law limitations on depreciation deductions apply to your situation.

New Break for QPP under OBBBA

The One Big Beautiful Bill Act (OBBBA) contains a special provision that allows 100% first-year depreciation for qualified production property (QPP) in the year it's placed in service. QPP means nonresidential real estate, such as a building, that's used as an integral part of a qualified production activity, such as the manufacturing, production or refining of tangible personal property.

Before the OBBBA, nonresidential buildings generally had to be depreciated over 39 years. Now you can potentially write off the cost of a whole manufacturing facility in the first year.  

This additional break is available for qualified property with construction periods beginning between January 19, 2025, and December 31, 2028. The property must be placed in service in the United States or a U.S. possession before 2031.

QPP doesn't include any part of nonresidential real property that's used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering activities, or other functions unrelated to the manufacturing, production or refining of tangible personal property.

Important: For individual taxpayers, 100% first-year QPP depreciation deductions may trigger the excess business loss rule discussed in the main article.