One Big Beautiful Bill Act Expands 100% Depreciation Expensing Opportunities

To incentivize new investments in U.S. manufacturing and production, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, makes important changes that significantly expand first-year depreciation expensing benefits for taxpayers. The legislation restores 100% bonus depreciation for qualifying assets, introduces a 100% depreciation deduction for investments in “qualified production property,” and enhances the Section 179 expense allowance. The new rules mean increased cash tax savings as early as 2025 for taxpayers that acquire and place in service qualifying assets— particularly those planning sizeable capital investments and those investing in certain manufacturing and production facilities. 

Permanent Restoration of 100% Bonus Depreciation 

The OBBBA permanently restores default 100% bonus depreciation for tangible MACRS property with a class life of 20 years or less, computer software, qualified improvement property, and certain other property listed in Section 168(k) that is acquired and placed in service after January 19, 2025. Original use of the property must begin with the taxpayer or the used property acquisition requirements must be met. The OBBBA also retains and permanently restores the 100% bonus depreciation election for specified plants, which allows a taxpayer engaged in the farming business to claim bonus depreciation when the specified plant is planted or grafted. A farming business has to make this election each year to claim bonus depreciation for the specified plants planted or grafted that year, instead of claiming bonus depreciation in the year the specified plant is placed in service. 

Property placed in service between January 1, 2025, and January 19, 2025, as well as property acquired on or before January 19, 2025, and placed in service after that date remains subject to the bonus depreciation phase-down rules as provided under prior law (40% for property placed in service before the end of 2025, 20% for property placed in service before the end of 2026, and 0% for property placed in service thereafter, with the transitional percentage starting at 60% for long production period property and certain aircraft).  

Determining the Property’s Acquisition Date  

Written Binding Contract Rules. Whether the government will adopt new standards for determining a property’s acquisition date in response to the OBBBA bonus depreciation changes or will continue to apply existing regulations (issued in 2019 and 2020 after the bonus depreciation changes made by the TCJA) is still uncertain. Under the existing guidance, if the acquisition of property is subject to a written binding contract that is entered into prior to the manufacture, construction, or production of the property, the taxpayer must look to the terms of the contract to determine the property’s acquisition date for purposes of bonus depreciation eligibility. A written binding contract is a contract that is enforceable against the taxpayer under state law and does not limit damages to a specified amount. 

Under the current written binding contract rules, property is acquired on the later of: 

• The date the contract is entered into;  
• The date the contract becomes enforceable under state law;  
• If the contract has one or more cancellation periods, the date on which all cancellation periods end; or  
• If the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied.  

Under existing guidance, property that is constructed, manufactured, or produced for the taxpayer by another person subject to a written binding contract is considered self-constructed property (see below), instead of being subject to the written binding contract rules described above. 

Property that is acquired under a contract that is not a written binding contract is acquired at the time the taxpayer pays or incurs greater than 10% of the total cost of the property, excluding the cost of land and preliminary activities. 

Self-constructed property. Property that is self-constructed (including property manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property) is deemed acquired when manufacturing, construction, or production begins. When such activities begin is a facts and circumstances test and generally coincides with the beginning of physical work of a significant nature. Physical work does not include preliminary activities, such as planning or designing, or securing financing. Under a safe harbor, a taxpayer may choose to determine that physical work of a significant nature begins at the time the taxpayer pays or incurs greater than 10% of the total cost of the property, excluding the cost of land and preliminary activities.  

Component election. Bonus depreciation can apply with respect to components of a larger property. Where the component election is made, even if the larger property doesn’t meet the acquisition date requirement, components acquired after January 19, 2025, may be eligible for bonus depreciation. A written binding contract must satisfy the acquisition rules in order for the component to qualify for bonus depreciation.  

Application of Bonus Depreciation to Used Property 

Used property is eligible for 100% bonus depreciation if it meets certain additional requirements: 

• The property must not have been used by the taxpayer or a predecessor prior to its acquisition (using a five-year look back rule); 
• The property must be acquired by purchase, using Section 179 concepts, which include the prohibition of acquisitions from certain related parties and controlled group members; and 
• The property’s cost basis cannot be determined by reference to the basis of other property held by the acquiring taxpayer. 

Electing Out of Bonus Depreciation and Alternative 40% Election  

As under the previous rules, the OBBBA allows taxpayers to elect out of bonus depreciation for an entire class of property for any year. The OBBBA also provides that taxpayers may elect 40% bonus depreciation, instead of 100%, for the first tax year ending after January 19, 2025 (60% for long production period property and certain aircraft). This election can also be made for specified plants. 

BDO Insights

Property must be both acquired and placed in service after January 19, 2025, to be eligible for 100% bonus depreciation. Identifying the acquisition date may require an analysis of the facts and circumstances, including reviewing contracts and determining when construction begins. For used property, taxpayers will also need to ensure the property has not been acquired in any prohibited situation (e.g., from certain related parties). 

Section 179 Expensing 

The OBBBA increases the annual Section 179 deduction from $1 million to $2.5 million with a phaseout threshold of $4 million (increased from $2.5 million). The changes to Section 179 are effective for property placed in service after December 31, 2024, with both the deduction and the phaseout threshold indexed for inflation in future years.  

BDO Insights

For taxpayers eligible to use Section 179, the yearly expensing election can be used to claim deductions for property not eligible for bonus depreciation. This election can also be used in combination with bonus depreciation or to manage the portion of the property’s cost that the taxpayer will claim as a deduction (unlike bonus depreciation, which is all or nothing for a class of property).   

The Section 179 expensing election is considered amortization for purposes of the Section 163(j) limitation on business interest, and taxpayers should model the impact of making this election to consider its impact on Section 163(j), as discussed below. 

New 100% Expensing of Qualified Production Property  

The OBBBA adds Code Section 168(n), which provides special 100% expensing for a new separate class of property known as qualified production property (QPP). The new rules allow taxpayers to elect to fully deduct amounts invested in QPP in the year the property is placed in service.  

Qualified Production Property  

Section 168(n) defines QPP as any portion of domestic nonresidential real property that meets the following requirements: 

• Construction of the property begins after January 19, 2025, and before January 1, 2029; 
• The property is placed in service within the U.S. or a possession of the U.S. before January 1, 2031; 
• The property is used by the taxpayer as an integral part of a qualified production activity;  
• The property’s original use commences with the taxpayer (unless an exception applies, see below); and 
• The property is not required to use the alternative depreciation system. 

Qualified production property does not include any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to a qualified production activity. 

Qualified Production Activity 

A qualified production activity includes the manufacturing, production (limited to agricultural and chemical production), and refining of a qualified product. A qualified product is generally tangible property. However, food and beverages prepared in the same building as a retail establishment in which they are sold are excluded from the definition of a qualified product. This exclusion will impact certain items prepared by restaurants, coffee shops, bakeries, caterers, and similar businesses.  

An activity will not be considered a qualified production activity unless it results in a substantial transformation of the property comprising the product. The OBBBA directs the IRS to issue guidance regarding what constitutes substantial transformation and indicates the guidance should be consistent with Section 954(d). Reg. Section 1.954-3 provides examples of activities that involve substantial transformation. 

Property that otherwise qualifies as QPP but is leased by the taxpayer to another party (including a related party) will not be considered used by the taxpayer as part of a qualified production activity, regardless of how the property is used by the lessee. 

Original Use Exception  

An exception to the original use requirement applies to acquired QPP meeting certain additional requirements. These include: 

• The taxpayer acquired the property after January 19, 2025, and before January 1, 2029; 
• The property was not used in a qualified production activity by any person between January 1, 2021, and May 12, 2025;  
• The property was not used by the taxpayer at any time prior to its acquisition; and  
• The property was not acquired from certain related parties or in certain types of transactions where the basis carries over from the seller. 

If these requirements are met, the QPP requirements regarding original use and the timing of when construction of the property begins are treated as satisfied. 

Written Binding Contract Rules 

Section 168(n)(2)(B)(ii) states that to determine whether construction begins within the required dates, property shall be treated as acquired no later than the date on which the taxpayer enters a written binding contract for such acquisition. Pending the potential issuance of future regulations or other IRS guidance, the existing written binding contract rules in the bonus depreciation regulations may provide relevant guidance for taxpayers to assess the potential applicability of Section 168(n) to their facts.  

Electing QPP Expensing 

Unlike for regular bonus depreciation, taxpayers must affirmatively elect QPP expensing for each taxable year it is claimed. The election is made with the taxpayer’s return. The exact manner of making the election will be prescribed in future regulations or other IRS guidance. 

Recapture Rules and Section 1245 

Special recapture rules apply to certain dispositions of QPP. Depreciation claimed on QPP must be recaptured and recognized as ordinary income if the property is disposed of or otherwise ceases to be used as part of a qualified production activity within 10 years after it is placed in service.  

In addition, Section 1245 applies to sales of QPP. A gain from the sale of QPP will result in ordinary income to the extent of the original purchase price of the property. 

BDO Insights

The ability to fully expense QPP represents a significant change from prior law, which required nonresidential real estate to be depreciated over a period of up to 39 years. However, the IRS will need to issue guidance in a number of areas for taxpayers to properly apply the QPP rules. As the timing of any guidance is uncertain, taxpayers should be aware of the open items, including:  

• What constitutes a “portion” of nonresidential real property for purposes of qualifying as QPP? 
• For the portion of property to qualify as QPP, does the use of the property need to be exclusive from non-QPP activity?   
• What constitutes an “integral part” of qualified production activity? 
• What is the scope of the limitation for agricultural and chemical “production”? 
• What is meant by “substantial transformation”? Will Treasury issue new regulations or can taxpayers rely on the regulations and other guidance under Section 954? 
• How does a taxpayer elect to expense QPP? 

Impact of 100% Expensing on Other Code Provisions 

Taxpayers should model the impact their bonus depreciation, Section 179, and QPP expensing deductions have on their total tax liabilities. These deductions can also have consequences for purposes of other Code provisions when the calculations are based on taxable income. Modeling the different options helps businesses identify beneficial tax strategies. Relevant calculations to consider may include, for example, the amount of any: 

• Section 55 corporate alternative minimum tax  
• Business interest expense deduction limitation under Section 163(j) 
• Costs capitalized under Section 263A (the UNICAP rules)  
• Net tested income (formerly global intangible low-taxed income) and/or foreign-derived deduction eligible income (formerly foreign-derived intangible income) under Section 250 
• Section 59A base erosion and anti-abuse tax (BEAT)  

Taxpayers should also consider the impact of the OBBBA expensing provisions on state returns, especially for states that do not follow federal Code provisions.  

BDO Insights

For taxable years beginning after December 31, 2024, the OBBBA again permits the addback of depreciation, amortization, and depletion in determining adjusted taxable income for purposes of the Section 163(j) interest expense limitation. For taxpayers with significant interest costs, increasing depreciation or amortization amounts may provide overall favorable results by increasing their interest deduction limitation under Section 163(j).  

In addition, taxpayers planning to take advantage of the OBBBA depreciation acceleration provisions should be aware of the impact such depreciation may have on their Section 263A/UNICAP calculations. To the extent accelerated depreciation deductions relate to assets directly or indirectly used in the production or resale of inventory, taxpayers may see increased UNICAP absorption ratios, effectively reducing the benefit of accelerated depreciation in the year claimed.  

Taxpayers that have used a simplified UNICAP methodology for at least three consecutive taxable years may elect to use the historic absorption ratio (HAR) for the following five tax years. Electing HAR enables the taxpayer to use an average of the prior three years’ ratios, which may mitigate the effect of accelerated depreciation deductions in future years. Additionally, taxpayers electing HAR receive the benefit of compliance cost savings and administrative relief from undertaking a full UNICAP calculation each year the election is in effect. 

Considerations for Owners of Pass-Through Entities   

The partnership rules for allocating items of income and deduction are complex and can produce unanticipated results. Thus, these rules should be carefully considered. Partnerships claiming bonus depreciation or electing QPP expensing under the new OBBBA rules will pass these deductions through to their owners as part of their allocations of taxable income or loss. Individuals and closely held C corporations who are partners in partnerships claiming significant deductions for QPP or bonus depreciation should be mindful of the various loss limitations including Section 704(d) tax basis limitations, Section 465 at-risk limitations, Section 469 passive loss limitations, and Section 461(l) excess business loss limitations, the application of which could limit the amount of these benefits for those partners — especially when those partners’ tax basis includes a share of the partnership’s nonrecourse liabilities or when those partners are not active in the trade or business of the partnership. Similar rules also apply to owners of S corporations.