OBBBA Tax Planning Opportunities: Bonus Depreciation Versus Section 179

In Summary

• The One Big Beautiful Bill Act (OBBBA) restored 100% first-year bonus depreciation and made it a permanent part of the tax code for qualifying property acquired under contract or beginning construction after January 19, 2025.
• The OBBBA significantly increased the Section 179 deduction limit from $1.22 million to $2.5 million and raised the phase-out threshold from $3.05 million to $4 million for 2025, making the provision accessible to larger businesses.
• Bonus depreciation is advantageous for large businesses, those with taxable losses, and is simpler to apply, while Section 179 is more flexible for targeting a specific net income result, is available for certain real property improvements (like HVAC and roofs) that bonus depreciation excludes, and is often more beneficial for state tax purposes.

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The Section 179 expense and bonus depreciation are both IRS provisions allowing businesses to deduct all or a significant portion of the cost of qualifying property in the year it’s placed in service, rather than depreciating the asset over its useful life. The One Big Beautiful Bill Act (OBBBA) expanded numerous taxpayer-friendly provisions in the tax code, including bonus depreciation and the Section 179 deduction. Businesses will now have the option to fully expense qualifying property in the first year, utilizing either bonus depreciation or Section 179. Below is an overview of the changes and how they will affect tax planning for business owners. 

Bonus Depreciation 

Bonus depreciation has been a temporary provision of the tax code, on and off, since 2001, and was set at 100% for a few years before it began to decrease in 2023. Before the OBBBA, bonus depreciation was scheduled to be 40% for 2025, 20% for 2026, and 0% thereafter. The One Big Beautiful Bill Act has restored 100% first-year bonus depreciation and made it a permanent part of the tax code, effective for property acquired after January 19, 2025.  

It’s important to note that the beginning date for this provision applies to the contract date. For example, if you were under contract to purchase a qualifying property before January 20, 2025, you’ll likely still be subject to 40% bonus depreciation on it, even if the property was purchased and placed in service after January 20. This also applies to property for which construction began before January 20, 2025. 

To qualify for bonus depreciation, property must be either new or used with a recovery period of 20 years or less (with certain exceptions, including for specific passenger vehicles).  Most types of tangible personal property used in an income-producing activity are eligible for bonus depreciation, including equipment, machinery, and furniture. Additionally, land improvements (such as sidewalks, fences, and parking lots) and most interior improvements to nonresidential buildings, including tenant leasehold improvements, are eligible for bonus depreciation.  

Advantages of Bonus Depreciation 

Bonus depreciation has simpler rules than Section 179 expense, and there are no annual expense maximums or purchase limits that apply to it, which may make bonus depreciation a better option for large businesses. Additionally, the Section 179 expense deduction is limited to taxable income from the active conduct of any trade or business (with limitations imposed at both the business and individual taxpayer level), making bonus depreciation a better option for business owners who frequently report taxable losses or limited taxable income. For example, rental real estate businesses often report taxable losses due to non-cash deductions such as depreciation, and they thus may not be able to take advantage of the Section 179 expense. Finally, bonus depreciation often provides a better deduction for large trucks and SUVs than Section 179 expense, and it’s better for businesses that have estates or certain types of trusts as direct or indirect owners. 

Updates to Section 179 Expensing 

Like bonus depreciation, Section 179 is a form of depreciation that allows taxpayers to write off the whole cost of qualifying property in the first year. Due to the annual expense limits, Section 179 has historically been intended for small to mid-sized businesses. However, the annual expense limit has more than doubled under the OBBBA: For 2025, companies can expense up to $2.5 million (up from $1.22 million in 2024).  

The OBBBA also increased the annual phase-out level from $3.05 million for 2024 to $4 million for 2025. When a business places an amount of eligible property in service exceeding the phase-out level, the Section 179 expense is reduced dollar for dollar. These higher limits will allow larger businesses with more assets placed in service to take advantage of the Section 179 expense.  Note that a group of companies with greater than 50% common ownership is treated as a single taxpayer for purposes of the annual expense limit. 

Most property eligible for bonus depreciation is also eligible for Section 179, including tangible personal property and interior improvements to commercial buildings. However, Section 179 expense can only be used for property acquired for use in a trade or business (excluding investment property, royalty property, and certain rental property). Also, land improvements, property placed in service by estates and certain trusts, and property predominantly used outside the U.S. are not eligible for Section 179 expense.  

On the other hand, some improvements to nonresidential real property that are ineligible for bonus depreciation are eligible for Section 179 expense, including roofs, HVAC property, fire protection and alarm systems, and security systems.  In addition, you can only take Section 179 to the extent of your income, and businesses with taxable losses cannot claim this deduction. 

Advantages of Section 179 Expensing 

Section 179 expense has significantly more rules and limitations than bonus depreciation, but it’s more flexible. Bonus depreciation is all or nothing, and a business can only elect out of it for assets in a specified property class (not asset by asset). In contrast, Section 179 expense can be used for any dollar amount on whichever assets you select. This allows companies to use Section 179 expense as a tool to target a desired net income result. 

Some improvements to nonresidential real property that aren’t eligible for bonus depreciation, including HVAC property, roofs, security systems, and fire protection and alarm systems, are eligible for Section 179. In addition, Section 179 expense is often more beneficial for state taxes than bonus depreciation. Most states allow at least some amount of Section 179 expense, while not permitting any bonus depreciation. In our region, for example, Virginia and Pennsylvania allow significant Section 179 expense, but do not allow bonus depreciation.  

Bonus Depreciation or Section 179? 

Bonus depreciation and Section 179 expensing both provide significant tax savings opportunities, but require a thorough understanding of tax law to maximize savings. If you have questions about bonus depreciation or Section 179 expensing, please contact your tax advisor or reach out to us using the contact form below.