Depreciation Under OBBBA: Tax Law Changes Business Owners Must Know

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Key Takeaways

• 100% bonus depreciation under OBBBA restored: Businesses can now fully expense qualifying assets placed in service after January 19, 2025, reversing the phase-out schedule that reduced deductions from 60% in 2024 to 40% in 2025.
• Section 179 limits increased: Expensing cap rises to $2.5 million with a $5 million phase-out threshold, up from $1.22 million and $3.05 million.
• EBITDA-based interest limitations return: The restoration of depreciation add-backs when calculating Adjusted Taxable Income expands business interest deductibility starting in 2025.
• Bottom Line: Strategic depreciation planning can reduce 2025 taxable income by hundreds of thousands of dollars for mid-sized businesses investing in equipment and property improvements.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, fundamentally reshapes how businesses recover capital investments through depreciation. For CFOs and business owners managing asset-intensive operations, these changes create immediate planning opportunities, along with new compliance considerations. 

Understanding Depreciation: The Foundation 

Depreciation systematically allocates the cost of tangible assets over their useful lives. Rather than deducting the entire purchase price immediately, businesses recover these costs over periods ranging from three years for specific equipment to 39 years for commercial real estate. 

This cost recovery serves three critical functions: matching expenses to revenue-generating periods, reflecting asset value declines on financial statements, and providing tax deductions that reduce current-year liabilities. 

MACRS vs. ADS: Two Depreciation Systems 

The Modified Accelerated Cost Recovery System (MACRS) accelerates depreciation deductions in early years, maximizing present-value tax benefits. Most businesses default to MACRS for equipment (five to seven-year recovery), vehicles (five years), and commercial buildings (39 years). 

The Alternative Depreciation System (ADS) requires longer recovery periods and straight-line depreciation. Real estate businesses electing out of the business interest limitation must use ADS for certain property, trading accelerated deductions for expanded interest deductibility. 

OBBBA’s Depreciation Provisions

100% Bonus Depreciation Returns

Starting with assets placed in service after January 19, 2025, businesses can deduct 100% of qualifying property costs in the year of service. This reverses the phase-out schedule that limited 2024 deductions to 60% and would have dropped to 40% in 2025. 

Qualifying property includes: 

• New and used machinery, equipment, and vehicles
• Computer systems and off-the-shelf software
• Furniture and fixtures
• Certain leasehold improvements 

Critical timing considerations: Projects with binding contracts or construction commenced before January 19, 2025, may qualify for a 100% bonus if placed in service after that date. Documentation becomes essential. Treasury guidance is expected to clarify these transitional rules. 

Strategic warning: Businesses with Excess Business Loss (EBL) limitations capped at $500,000 for joint filers should evaluate whether bonus depreciation under OBBBA creates unusable deductions. Electing out of bonus depreciation or taking partial deductions may optimize tax benefits without waste. 

Section 179 Expensing Expansion 

The immediate expensing limit increases to $2.5 million for 2025, with phase-out beginning at $5 million of qualifying property placed in service. This compares to the 2024 limits of $1.22 million and $3.05 million, respectively. 

Unlike bonus depreciation, Section 179 cannot create net operating losses. This makes it ideal for profitable businesses seeking to offset current-year income without triggering EBL concerns. Trusts generally cannot claim a Section 179 deduction 

Expanded qualifying property: 

• HVAC systems
• Fire protection and alarm systems
• Security systems
• Roofs
• Interior improvements (elevators, escalators, structural framework
  

Qualified Production Property: A Manufacturing Incentive 

Businesses can claim 100% first-year depreciation for Qualified Production Property placed in U.S. service. This applies to nonresidential real property used in manufacturing, production, or refining tangible personal property. 

Timing requirements: 

• Construction must begin after January 19, 2025
• Construction must begin before January 1, 2029
• Property must be placed in service before January 1, 2031

Manufacturers investing in new facilities gain significant tax advantages through this provision, potentially expensing millions in construction costs immediately rather than depreciating over 39 years. 

Business Interest Deduction Enhancement 

The OBBBA restores depreciation, amortization, and depletion add-backs when calculating Adjusted Taxable Income (ATI) for business interest limitation purposes. This shifts the limitation from 30% of EBIT to 30% of EBITDA starting in 2025. 

Real-world impact: A business with $10 million EBIT and $2 million depreciation now has $12 million ATI for interest limitation calculations, expanding deductible interest from $3 million to $3.6 million annually. 

Real estate businesses must carefully evaluate whether electing out of the interest limitation (requiring ADS depreciation) or accepting the limitation (retaining MACRS) provides better overall tax benefits. 

Industry-Specific Depreciation Applications

Construction and Real Estate 

Construction firms benefit from accelerated depreciation under OBBBA on equipment, while development projects benefit from cost segregation. Breaking down building components identifies five, seven, and 15-year properties within otherwise 39-year structures. 

Real estate investors face the perpetual election decision: avoid the 163(j) interest limitation by using ADS, or accept the limitation while retaining MACRS acceleration. With EBITDA-based calculations returning, more businesses can maximize both interest deductions and accelerated depreciation. 

Manufacturing and Distribution 

Equipment-intensive operations gain immediate cash flow benefits through 100% bonus depreciation. Companies investing $5 million in manufacturing equipment that previously generated $2.4 million in first-year depreciation (60% bonus) now receive the full $5 million deduction. 

Professional Services 

Technology investments in servers, workstations, and software qualify for immediate expensing. Professional service firms, historically limited by Specified Service Trade or Business (SSTB) restrictions on certain deductions, face no such limitations for depreciation benefits. 

Common Depreciation Challenges and Solutions 

Challenge: Determining whether in-progress projects qualify for 100% bonus depreciation. 

Solution: Maintain detailed documentation of binding contracts and construction commencement dates. Consult with tax advisors before placing the property in service to optimize elections. 

Challenge: State tax conformity varies significantly. 

Solution: Many states don’t conform to federal bonus depreciation or Section 179 limits. Multi-state businesses must calculate federal and state depreciation separately, potentially creating substantial book-tax differences. 

Challenge: Financial reporting impacts. 

Solution: Accelerated tax depreciation creates deferred tax assets. Companies must evaluate valuation allowances when future profitability is in question. Coordination between tax and financial reporting teams prevents surprises. 

Challenge: Excess Business Loss limitations trap deductions. 

Solution: Consider partial bonus elections, spreading depreciation over several years, or timing asset acquisitions to match income recognition. 

Best Practices for Asset Lifecycle Management 

Perform cost segregation studies: Real estate investments benefit dramatically from identifying accelerated components within otherwise long-lived structures. Studies typically identify 20-40% of building costs as shorter-lived property. 

Document capitalization policies: Clear policies distinguishing repairs from improvements to prevent audit issues. The tangible property regulations provide safe harbors that simplify determinations. 

Coordinate with financial reporting: Book-tax differences from accelerated depreciation require careful ASC 740 analysis. Companies should project tax provisions quarterly to avoid year-end surprises. 

Plan around EBL limitations: High-income owners of pass-through entities face $500,000 loss limitations. Strategic timing of asset acquisitions and income recognition prevents suspended deductions. 

Monitor useful life estimates: AI and technology assets often have shorter useful lives than traditional software. Regular impairment assessments ensure that carrying values reflect current conditions. 

Looking Ahead: Depreciation Trends and Deadlines 

Section 179D and 45L sunsetting: Energy-efficient building deductions (179D) and residential energy credits (45L) expire for projects started after June 30, 2026. Businesses should accelerate eligible projects to capture these benefits before deadlines. 

Permanent provisions create planning stability: The OBBBA makes several provisions permanent, including the Qualified Business Income deduction and enhanced estate tax exemptions. This stability enables multi-year depreciation strategies previously impossible under temporary rules. 

Regulatory guidance forthcoming: Treasury is expected to issue regulations clarifying transitional rules for in-progress projects and the definitions of qualified production property. Businesses should monitor guidance to optimize elections. 

Take Action on Your Depreciation Strategy

The OBBBA’s depreciation changes create immediate tax savings opportunities for businesses investing in property and equipment. Strategic planning requires analyzing your specific asset mix, profitability projections, and entity structure to maximize benefits while avoiding pitfalls like EBL limitations. 

Wiss’s tax advisory team specializes in depreciation under OBBBA strategies for mid-sized businesses navigating complex capital investment decisions. Our professionals help clients optimize Section 179 elections, coordinate cost segregation studies, and model multi-year tax scenarios to maximize cash flow benefits. 

Ready to reduce your 2025 tax liability through strategic depreciation planning? Contact our team at Wiss today to schedule a consultation. We’ll analyze your current asset portfolio, identify immediate expensing opportunities, and develop a comprehensive strategy that aligns with your business objectives.

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