Advisory|Financial Reporting|Strategic Guidance, Value Building

New Depreciation Rules with the Passing of OBBBA

Posted on by Whittaker

Introduction

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, brings sweeping changes to how businesses recover the cost of their capital investments. From 100 percent bonus depreciation to new expensing rules for real property, these updates significantly impact tax planning and cash flow.

Here’s what business owners need to know about the changes in depreciation under OBBBA, how they differ from prior law, and how to plan ahead.

What Was the Prior Law?

Before OBBBA, depreciation was guided by the Tax Cuts and Jobs Act (TCJA). Under that law, bonus depreciation phased down from 100 percent to zero between 2023 and 2027, while Section 179 expensing limits were capped near $1.25 million with phase-outs around $3.13 million.

Real property improvements generally had long recovery periods, such as 39 years for nonresidential real property. These limitations made long-term capital planning more difficult for growing businesses.

What Changed Under OBBBA?

1. Permanent 100 Percent Bonus Depreciation

OBBBA made 100 percent bonus depreciation permanent for qualifying property placed in service after January 19, 2025.

Eligible property includes:

  • Tangible property with a recovery period of 20 years or less

  • Qualified improvement property (QIP)

  • Used property that meets acquisition requirements

Taxpayers can elect out of bonus depreciation for one or more asset classes if desired, allowing for strategic timing of deductions.

2. New 100 Percent Expensing for Qualified Production Property (QPP)

OBBBA introduced a new category, Qualified Production Property (QPP), extending full expensing to certain nonresidential real property used in production activities.

To qualify:

  • Construction must begin after January 19, 2025, and before January 1, 2029

  • The property must be placed in service before December 31, 2030

  • It must be used for production activities such as manufacturing or refining

If the property ceases to be used in production within 10 years, part of the deduction may be recaptured.

3. Expanded Section 179 Expensing Limits

OBBBA increases Section 179 limits to $2.5 million for tax years beginning after December 31, 2024, with a phase-out threshold of $4 million. These amounts are indexed for inflation starting in 2026.

Section 179 is ideal for property that may not qualify for bonus depreciation, or when taxpayers want to fine-tune deductions to avoid creating losses.

4. Interaction with Other Tax Rules

OBBBA’s depreciation provisions affect other areas of tax planning, including business interest limitations and net operating losses (NOLs). Depreciation deductions can significantly reduce adjusted taxable income, so timing and modeling are crucial.

Planning Implications for Businesses

Immediate Cash Flow Advantages

The new rules allow businesses to deduct the full cost of equipment and qualified property in the first year, rather than spreading deductions over time. This accelerates tax savings and improves cash flow for reinvestment.

Documentation and Timing

To take advantage of OBBBA’s depreciation benefits:

  • Ensure property is purchased or constructed after January 19, 2025

  • Maintain documentation that supports qualification as QPP or other eligible assets

  • Consider a cost segregation study for mixed-use properties

Strategic Forecasting

While full expensing maximizes current-year deductions, it may reduce deductions in future years. A multi-year tax projection helps align depreciation strategies with expected profitability and growth.

Example Scenario

A manufacturing company builds a $10 million production facility in 2026.

  • Old law: Depreciated over 39 years (~$256,000 per year)

  • Under OBBBA: Potential full write-off in 2026, assuming the property qualifies as QPP

This could dramatically reduce taxable income in the first year and improve short-term cash flow.

Action Steps for Business Owners

  1. Review capital budgets to identify eligible property acquisitions or construction.

  2. Time purchases strategically to meet OBBBA’s effective dates.

  3. Evaluate elections — consider opting out of full expensing for some assets.

  4. Perform cost segregation for new facilities or major improvements.

  5. Model long-term outcomes to manage future tax impacts and NOL usage.

  6. Consult your CPA to navigate state-level differences and federal elections.

Whittaker