How the One Big Beautiful Bill Act changes bonus depreciation
The OBBBA permanently reinstated 100% bonus depreciation for most qualified property acquired after Jan. 19, 2025. This includes tangible property with a class life of 20 years or less, consistent with prior bonus depreciation rules.
Importantly, property acquisitions for which a written binding contract was entered into before Jan. 20, 2025, is treated as acquired on written binding contract date, which may cause otherwise eligible property to not be eligible for the expanded 100% bonus depreciation.
In addition, the OBBBA introduces a new, temporary full expensing provision for “qualified production property”—a category of building property typically excluded from bonus depreciation due to its 39-year class life. To qualify, the property must meet all of the following criteria:
- Used by the taxpayer as an integral part of a qualified production activity
- Placed in service in the United States, or any possession of the United States
- Its original use commenced with the taxpayer
- Construction began after Jan. 19, 2025, and before Jan. 1, 2029
- Designated by election
- Placed in service before Jan. 1, 2031
Notably, leased property does not qualify, and portions of buildings used for nonproduction purposes (e.g., offices, research and development, sales) are excluded. A special rule allows certain used property to qualify if it hasn’t been used in a production activity since Jan. 1, 2021.
Bonus depreciation restored and expanded: Implications for businesses
The return of 100% bonus depreciation means that capital investments—whether in machinery, equipment, or qualifying facilities—can be deducted in full in the year they are placed in service. This can significantly reduce taxable income and improve after-tax cash flow, freeing up capital for reinvestment or other strategic uses.
The new provision for qualified production property is significant for manufacturers, refiners, and producers. It opens the door to fully expense the cost of constructing or acquiring production facilities—an option that was previously unavailable.
However, the benefits come with complexity. Businesses must carefully assess whether their property qualifies, especially when it comes to mixed-use buildings or repurposed facilities. The 10-year recapture rule also means that if the property ceases to be used in a qualified production activity, some of the tax benefits may be clawed back.
What businesses should do now
To take advantage of the restored and expanded bonus depreciation rules, businesses should:
- Review capital expenditure plans for 2025 and beyond to identify eligible property.
- Evaluate construction timelines to ensure new facilities meet the placed-in-service and construction start deadlines.
- Model tax impacts of electing 100% vs. reduced bonus depreciation (40% or 60%) to align with broader tax planning goals, such as managing taxable income or spreading deductions over time.
- Segment building use to isolate qualifying production areas from non-qualifying functions, helping compliance and maximizing the benefit.
Long-term considerations
While accelerated depreciation can enhance short-term tax efficiency, it may not always align with long-term tax strategy. Businesses should:
- Model multiyear tax outcomes to avoid unintended consequences, such as triggering higher taxable income in future years.
- Coordinate with broader tax planning efforts, including net operating loss (NOL) utilization and credit strategies.
- Monitor legislative developments, as temporary provisions—especially those tied to qualified production property—may evolve or sunset.
