The Return of 100% Bonus Depreciation: A Permanent Game-Changer for Business Investment

Few tax provisions offer the immediate financial power of bonus depreciation. For years, this incentive has been a critical tool for business growth. It allows companies to immediately write off the cost of major assets.

Recent legislative changes have now solidified the deduction. Understanding the rules and strategic advantages is essential. This knowledge is key to maximizing your company’s profitability and cash flow. Whether you are buying new equipment, upgrading property, or planning your next fiscal year, this guide provides the clarity you need. Learn to leverage the permanent 100% bonus depreciation rule to its fullest.

Bonus depreciation is a powerful tax incentive. It is also known as the additional first-year depreciation deduction (IRC 168(k) allowance). This rule allows businesses to immediately deduct a significant percentage of an asset’s cost. This deduction is now permanently 100%. The deduction applies in the year the qualifying assets are placed in service.

Instead of spreading the deduction over the asset’s useful life under the Modified Accelerated Cost Recovery System (MACRS), this accelerated tax write-off reduces a company’s taxable income, providing an immediate boost to cash flow and lowering tax liability.

The biggest news for tax planning is the elimination of the planned phase-out of bonus depreciation.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restores the 100% deduction for qualifying property. This stability enables much more predictable long-term capital planning and removes the pressure to make investment decisions under a deadline.

Previous Phase-Out Schedule vs. Current Law

Key Date to Remember:

The permanent 100% rate applies to qualifying property acquired and placed in service after January 19, 2025. Assets acquired before this date but placed in service in 2025 are subject to the prior 40% rate. The acquisition date for tax purposes is generally the date on which a written binding contract is entered into.

To qualify for the full 100% deduction, property must meet specific criteria under IRC section 168(k):

Depreciable Life: The asset must be tangible property with a MACRS recovery period of 20 years or less. This typically includes:

Used Property Inclusion: A critical change from prior law is that both new and used property qualify, provided the taxpayer is the first person to use the property in their business (i.e., it must not have been previously used by the taxpayer or a related party).

Placed in Service: The asset must be purchased and ready and available for use in the business during the tax year the deduction is claimed.

This is a critical classification for real estate investors and business owners who lease commercial space.

QIP refers to certain interior improvements made to nonresidential real property (commercial buildings) that are placed in service after the building was first placed in service. Thanks to a prior legislative correction, QIP is classified as 15-year property, which makes it eligible for 100% bonus depreciation.

Exclusions: QIP does not include expenditures related to:

The permanence of 100% bonus depreciation unlocks powerful, predictable strategies for businesses:

For businesses that own or purchase commercial or residential real estate, a cost segregation study is the most effective way to leverage bonus depreciation.

A building’s shell is typically depreciated over 39 years (commercial) or 27.5 years (residential). A cost segregation study identifies and reclassifies components like specialized wiring, dedicated plumbing, site improvements (paving, fences), and certain fixtures into shorter MACRS lives (five, seven, or 15 years).

By reclassifying these shorter-lived assets, they become immediately eligible for the 100% bonus depreciation, allowing a substantial, non-cash deduction in the first year of ownership or improvement.

Both provisions offer immediate expensing, but they differ significantly, making their combined use highly strategic:

Strategic Use: Large businesses with capital purchases exceeding the $4 million Phase-Out Threshold must rely on Bonus Depreciation. Smaller or mid-sized businesses can use Section 179 first (to maximize the deduction up to the limit) and then use 100% Bonus Depreciation for any remaining asset costs, generating a full 100% write-off.

While it may seem counterintuitive, a business can opt out of bonus depreciation. This election must be made by asset class (e.g., all five-year properties). This is useful if a business anticipates higher taxable income in future years and wishes to defer some depreciation to offset that future income more effectively.

State Tax Conformity: Not all states automatically conform to the federal bonus depreciation rules. Many states still require businesses to use standard MACRS depreciation schedules, which can complicate state tax filings. Always consult a tax professional to understand your state’s specific rules.

Depreciation Recapture: If you sell a depreciated asset for more than its remaining tax basis, the previous depreciation deductions will be “recaptured” and taxed as ordinary income upon the sale. This is a critical factor for assets with a short holding period.

Need help applying the 100% bonus depreciation rules to your specific business investments, including compliance with state laws and optimizing for Cost Segregation? Contact our tax experts today to schedule a strategic planning session.