Maximizing Your Business Tax Benefits: Bonus Depreciation and New Expensing Rules

The resurgence of 100% bonus depreciation marks a pivotal change in U.S. tax policy, crucial for stimulating business growth amid economic challenges. Originally emphasized in the 2017 Tax Cuts and Jobs Act (TCJA), this tax incentive is revitalized by the "One Big Beautiful Bill Act," offering substantial benefits to businesses as they navigate post-pandemic recovery. This blog delves into the tax advantages, historical developments, detailed criteria, and recent changes pertaining to bonus depreciation, providing a comprehensive overview for strategic business planning.

The Historical Overview of Bonus Depreciation - Initially introduced in the 2002 Job Creation and Worker Assistance Act to spur economic activity, bonus depreciation allowed for substantial upfront deductions on qualifying property. It began with a 30% deduction rate, scaled to 50%, and ultimately reached 100% during downturns.

The TCJA further modified these terms to include a 100% first-year deduction for eligible property, making it a powerful economic tool. However, it incorporated a sunset provision that would gradually eliminate this benefit starting in 2023 until 2027 when it would be phased out entirely.
Tax Implications and Planning Opportunities - By allowing businesses to deduct the full cost of assets in their first year of service, bonus depreciation significantly enhances cash flow by reducing taxable income. Yet, strategic planning is paramount. For instance, the Section 199A deduction, based on qualified business income (QBI), may be impacted by substantial write-offs, thus altering the Sec 199A deduction. Alternatively, reducing taxable income through strategic depreciation planning might help bypass certain phase-outs associated with Section 199A.
Eligibility Requirements - Qualifying properties include tangible assets with a recovery period of 20 years or less, software, water utility properties, and particular improvements and productions, as determined by IRS guidelines. While real property is generally excluded due to its extended recovery period (27.5 or 39 years), the TCJA expanded eligible property to include both new and used items, albeit public utilities and dealer properties related to vehicles remain ineligible.
Revocation of Bonus Depreciation and AMT Considerations - Generally, withdrawing an election for bonus depreciation requires IRS approval unless done within a six-month window on an amended return. Remarkably, properties that opt for bonus depreciation are exempt from Alternative Minimum Tax (AMT) adjustments, simplifying tax reconciliations.
The Impact of Recent Legislation - The "One Big Beautiful Bill Act" reaffirms 100% deductions for qualified properties placed in service after January 19, 2025, securing bonus depreciation as a permanent fixture in tax policy. For those items placed into service between January 1 and January 19, 2025, a 40% increased deduction applies, fostering long-term economic stability through favorable tax incentives.
Qualified Production Property and Manufacturing Incentives - In a strategic move to boost U.S. manufacturing, the Act also substantiates the tax benefits by allowing immediate expensing for qualified production property placed in service after July 4, 2025. These properties, dedicated to production activities, are granted immediate deductibility, provided they commence original use in the U.S. and are not allocated for administrative or sales purposes.

The robust advantages of bonus depreciation can be substantial in propelling economic growth by easing capital investments. However, a nuanced understanding of its details, including constraints and alignment with Section 199A, and AMT is essential. The newly introduced incentives for production property serve as a catalyst for bolstering domestic manufacturing industries. These provisions are often perceived as tools for large enterprises but are equally beneficial for small industrial players. Are you considering how bonus depreciation could be applied to your business's strategic advantage? Reach out to our office for detailed insights tailored to your needs.

Maximizing Your Business Tax Benefits: Bonus Depreciation and New Expensing Rules

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