100% Bonus Depreciation Restored: OBBBA Capital Expensing Guide

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025 (IRC §168(k)). Bonus depreciation allows businesses to deduct the full cost of qualifying property in the year it's placed in service, bypassing the normal depreciation schedules that otherwise spread deductions over 5, 7, 15, 27.5, or 39 years depending on asset class. For example, a business purchasing $1 million in manufacturing equipment can deduct 100% of that cost immediately in 2026, creating a $1 million deduction against taxable income in that year. When combined with Section 179 expensing limits, a business can potentially deduct most or all capital investments in the year they are made. Qualifying property includes tangible property with a class life of 20 years or less, including equipment, machinery, furniture, computers, and qualified leasehold improvements. The OBBBA introduced expansion of bonus depreciation to include building property (like manufacturing facilities) used in qualified production activities under 'qualified production property' provisions (IRC §168(n)), which previously were traditionally depreciated over 39 years.

The interaction between Section 179 and bonus depreciation operates as follows for maximum tax benefit. Section 179 is applied first (up to the $2.56 million limit and applicable income limits), then 100% bonus depreciation applies to remaining qualified property. A business purchasing $5 million in manufacturing equipment would deduct $2.56 million under Section 179, then 100% bonus depreciation applies to the remaining $2.44 million, resulting in a $5 million total deduction (less any remaining basis limitations). The election-out provision (IRC §168(k)(7)) allows taxpayers to forgo bonus depreciation in whole or in part: for example, in a loss year where the full deduction cannot be used in the current year, electing out allows deferral of deductions to profitable years. Additionally, reduced bonus depreciation (40% or 60%) can be modeled against full expensing to manage income recognition or to spread deductions across years for Alternative Minimum Tax (AMT) purposes. Property subject to a written binding contract dated before January 20, 2025, does not qualify for the restored 100% bonus depreciation—only prior-law depreciation treatment applies. Contract timing is a factor in OBBBA planning considerations.

Under current law, 100% bonus depreciation and increased Section 179 limits apply concurrently. The timing of capital expenditures relative to profitable years affects the use of these deductions. Real estate businesses can deduct qualified production property (buildings and related assets for manufacturing, farming, or other production activities) at 100% under IRC §168(n). However, certain restrictions apply: assets used in real property development activities and certain listed property may have different rules. Additionally, the interaction with passive activity loss limitations (for real estate professionals and investors) creates planning considerations. For businesses structured as S-Corps, LLCs, or partnerships, the deductions flow through to owners' individual returns, which flow through to owners' individual federal and state returns. Given the permanent nature of these provisions, timing of capital investments interacts with overall business strategy and cash flow planning.