Section 179: Immediate Expensing for Qualified Assets 

The main purpose of § 179 of the Internal Revenue Code is to allow businesses to deduct the cost of certain qualifying property (like equipment and software) in the year it is placed into service, rather than recovering that cost over time through depreciation (under § 168). 

Qualifying property under § 179 includes new or used depreciable tangible property that is purchased for deployment in the active conduct of a trade or business. Examples of § 179 property include machinery and business vehicles. The Tax Cuts and Jobs Act of 2017 (TCJA) expanded the definition of § 179 property to include certain improvements made to nonresidential real property, such as roofing; HVAC systems; and fire protection, alarm, and security systems. 

The § 179 deduction is capped by an investment amount and an income limitation. Before OBBBA, the investment amount was $1 million (adjusted for inflation), but the deduction would also be reduced by the “threshold amount,” which is the amount by which the cost of § 179 property placed in service during the taxable year exceeds $2.5 million (also adjusted for inflation). The income limitation ensures that the deduction cannot exceed the total taxable income derived from all active trades or businesses the taxpayer owns. 

With the passage of OBBBA, the § 179 investment amount is increased from $1 million to $2.5 million (adjusted for inflation), the threshold amount is increased from $2.5 million to $4 million (also adjusted for inflation), and the income limitation stays the same. These changes are effective for property placed in service during tax years beginning after December 31, 2024. 

Section 168: Bonus Depreciation 

Section 168 of the Internal Revenue Code allows taxpayers to deduct a “reasonable allowance” for the exhaustion, wear and tear of property used in the trade or business or held for the production of income. Generally, depreciation deductions occur gradually over a number of years specified by a handful of cost recovery regimes, perhaps the most well-known of which is MACRS (the modified accelerated cost recovery system). For certain qualified property, though, the Code provides for “bonus depreciation,” which allows businesses to immediately deduct a large percentage (up to 100%) of the cost of an asset in the year it is placed in service. 

Between Sections 168 and 179, the former tends to be more favorable for larger firms because there is no dollar limit on the amount that can be deducted during a given taxable year; in addition, there are no phase-outs (such as § 179’s threshold amount) and no limits based on total deductions or company income. Even so, a business may use both § 168 and § 179 in the same taxable year and on the same asset; however, § 179 must be applied first to reduce the asset’s basis before § 168 kicks in. 

Section 168 Before OBBBA 

The TCJA supercharged bonus depreciation by increasing it to allow for deduction of 100% of the cost of qualifying property between 2018 and 2022. Between 2023 and 2025, the maximum percentage deduction in the first year decreased by 20% per year, so without any legislative changes, bonus depreciation would have been 20% of the cost of the qualifying property in 2026, and the concept would have been completely phased out in 2027. 

After OBBBA 

OBBBA makes bonus depreciation permanent—or, at least, it does not identify a phase-down or expiration date. While it does not change the decreased bonus depreciation amounts for property placed in service during the years 2023 and 2024, bonus depreciation for property placed in service during 2025 will go back up to 100% and stay there until any future legislation changes the rules. 

*Qualified property acquired before January 20, 2025 is subject to the TCJA bonus rates

Qualified Property

The bonus depreciation allowance under the temporary TCJA provision – and now the permanent OBBBA provision – is available for new and certain used property that is: 

• Depreciable under MACRS and has a recovery period of 20 years or less; 
• MACRS water utility property; 
• Computer software depreciable over three years under § 167(f); or 
• Film and live theatrical productions acquired and placed in service after September 27, 2017 (§ 168(k)(2)(A)). 

Qualified Production Property

OBBBA now allows for taxpayers to elect eligibility for 100% bonus depreciation for qualified production property, which is nonresidential real property used by the taxpayer in a qualified production activity (manufacturing, production, or refining of qualified products). The property must be placed in service in the United States, and the original use must begin with the depreciating taxpayer. The property must be constructed after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031. 

In addition to new qualified production property, § 168(n)(2)(B) allows taxpayers to elect the special depreciation allowance for used qualified production property acquired by the taxpayer after January 19, 2025, and before January 1, 2029. Property previously owned by the same taxpayer does not qualify. 

What This Means for You As Our Clients: 

The changes to bonus depreciation are an unmitigated victory for anybody who deploys qualified property in her investment or business activities. While taxpayers do have the option to elect out of bonus depreciation if spreading the deductions would somehow be beneficial, most taxpayers will gladly claim the tax advantage upon becoming eligible. 

Timing-wise, taxpayers should accelerate purchases of qualifying property to occur before the 2029 swearing-in of the next President of the United States. Taking into account the fiscal warning bells sounding throughout the ranks of sovereign debt experts, bonus depreciation could prove a popular target for a President of any political stripe when confronting the possibility of future fiscal and tax reform through legislation. Even a Republican-controlled Congress with a President leaning further to the right on fiscal responsibility could decide to revisit the “permanency” of bonus depreciation post-OBBBA. Therefore, our inclination is to recommend that taxpayers make plans to deploy capital over a roughly three-year period to best ensure the tax benefits attach. 

The reintroduction of bonus depreciation will also expand the syndication of funds investing in depreciable assets to allow for investors to claim leveraged deductions. Although investors’ ability to use the deductions will be limited by the at-risk rules, the passive activity rules, and other loss-limiting provisions of the Code, many of these vehicles contain clever workarounds and other design features to allow investors to maximize the utility of the deductions regardless. Expect these types of syndications to multiply in the coming years, and if a taxpayer’s risk appetite makes these investments a palatable option, she will be hard-pressed to avoid the temptation of using them. 

DISCLAIMER: This summary is not legal or tax advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.