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Unlocking Business Tax Savings: The Return of 100% Bonus Depreciation

The revival of 100% bonus depreciation is a pivotal feature in recent U.S. tax reforms designed to stimulate economic growth. The "One Big Beautiful Bill Act" permanently reinstates bonus depreciation, a move that holds significant implications in the post-pandemic economy. This article delves into the historical evolution, advantages, and specific regulations of bonus depreciation, focusing on its latest developments.

  • Historical Evolution of Bonus Depreciation - Bonus depreciation was first enacted in 2002 under the Job Creation and Worker Assistance Act, enabling businesses to write off a significant portion of property costs immediately. Initially set at 30%, the deduction escalated to 50% and ultimately to 100% during economic downturns. The 2017 Tax Cuts and Jobs Act (TCJA) enhanced this by allowing full first-year deductions for qualified properties, stimulating business investments. However, the bonus depreciation rate was set to phase out beginning in 2023.

  • Tax Advantages - Businesses can deduct the entire cost of assets in the year they are placed in service, offering immediate tax relief and boosting cash flow. This strategic incentive often requires careful planning; for instance, the Section 199A deduction relies on qualified business income (QBI), meaning extensive capital purchases can lower an entity’s profit, impacting the Sec 199A deduction. Nevertheless, minimizing taxable income might be advantageous in evading specific phase-outs within the 199A framework.

  • Qualifying for Bonus Depreciation - Eligible property typically includes tangible assets with a recovery period of 20 years or less, along with certain software and improvements. The TCJA expanded eligibility to include both new and used property, broadening investment options in pre-owned equipment.

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    Qualified Improvements - Initially omitted under TCJA, the inclusion of leasehold, restaurant, and retail improvements as qualified improvement properties eligible for bonus depreciation was corrected by the CARES Act.

  • Revocation and AMT Implications - The process of opting out of bonus depreciation typically requires IRS consent, but can be reversed within six months via an amended return if initially elected timely. Properties claiming bonus depreciation are exempt from alternative minimum tax adjustments, aligning depreciation relief across both regular tax and AMT.

  • Depreciation Rules for Business Automobiles - Specific rules apply to business automobiles categorized as "luxury autos." The TCJA increased the depreciation limit by $8,000 during years when bonus depreciation is allowed.

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    New Legislation Outcomes - The "One Big Beautiful Bill Act" reinstates a 100% deduction for qualified property purchased and in service post-January 19, 2025, solidifying bonus depreciation as a permanent fixture. This extension helps businesses align their long-term planning with larger economic strategies.

  • Bonus for Qualified Production Property - This new provision stimulates domestic manufacturing by allowing a full deduction on the cost of specific new factories and structural improvements post-July 4, 2025. These deductions are built around specific eligibility criteria, including use in qualified production activities and placement within the U.S.

The reintroduction of 100% bonus depreciation is instrumental for economic recovery, offering businesses substantial incentives for capital investments. While the benefits are considerable, navigating the complexities involving QBI deductions and AMT implications requires thoughtful planning. The inclusion of qualified production property further incentivizes manufacturing investments within the U.S., applicable to both large companies and smaller manufacturing facilities.

If you operate a business and seek to understand how bonus depreciation could help your enterprise, please reach out to our tax and accounting office in Maitland, Florida for specialized guidance.

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