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OBBBA Restores 100% Bonus Depreciation: What Business Owners Need to Know

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, reversed one of the most significant tax policy changes since 2017. The Tax Cuts and Jobs Act (TCJA) established 100% bonus depreciation from 2018–2022, then scheduled a phase-down: 80% for 2023, 60% for 2024, 40% for 2025, and 20% for 2026 before complete expiration in 2027. The OBBBA wiped out that phase-down for property placed in service after January 19, 2025, restoring the 100% rate retroactively. A business that purchased equipment in February 2025 expecting only 40% bonus depreciation can now claim 100% — a significant windfall for capital-intensive businesses that had already planned their purchases.

For businesses that filed 2025 returns before the OBBBA was enacted, amended returns may be necessary to capture the higher deduction. Consult a tax professional about whether an amended return is cost-effective given the additional deduction available.

How Bonus Depreciation Interacts with Section 179

Bonus depreciation and Section 179 are layered strategies, not alternatives. The standard approach is to apply Section 179 first — selecting specific assets to expense up to the income limitation — then apply bonus depreciation to the remaining adjusted basis of all eligible assets. Section 179 is useful when you want to allocate deductions strategically across different asset types. Bonus depreciation is the blunt instrument: it applies automatically to the remaining cost of all qualifying assets and can produce a net operating loss that carries forward to offset future income.

One important distinction: Section 179 is limited by the business's taxable income for the year and cannot create a loss. Bonus depreciation has no such limit. A startup with $200,000 in equipment purchases and only $50,000 in taxable income can use Section 179 to eliminate the $50,000 of income, then carry the remaining $150,000 in bonus depreciation forward as an NOL carryforward — or simply rely entirely on bonus depreciation for all $200,000, creating a $150,000 NOL immediately.

Qualifying Assets: What Is and Isn't Eligible

Bonus depreciation applies to tangible property with a MACRS recovery period of 20 years or less — this includes most equipment, machinery, computers, vehicles, and qualified improvement property (QIP). QIP covers interior improvements to nonresidential buildings, a category that was inadvertently excluded from bonus eligibility under the TCJA until a technical correction in 2020 assigned it a 15-year recovery period.

Real property with recovery periods longer than 20 years does not qualify: residential rental buildings (27.5 years), commercial buildings (39 years), and land improvements classified as 15-year property that miss the sub-20-year threshold. The "new to you" rule for used property — introduced by the TCJA — remains in place under the OBBBA: a used asset qualifies for bonus depreciation as long as neither you nor a predecessor has claimed depreciation on it, and it was not acquired from a related party.

Electing Out and When It Makes Sense

Bonus depreciation is the default — it applies automatically unless you elect out. Elections out are made by property class (e.g., "no bonus on all 5-year property") on a timely filed tax return. Businesses may want to elect out when they expect to be in a significantly higher tax bracket in future years, making future-year deductions more valuable. Some states do not conform to federal bonus depreciation rules, so the federal deduction creates a state addback that can complicate planning. Real estate professionals subject to passive activity rules may also benefit from managing the timing of large deductions carefully. In most cases, however, the time value of money makes taking 100% bonus depreciation immediately the superior economic choice.