Recent ‘Renovations’ to Fixed Asset Planning: How the OBBBA Impacts Depreciation

The One Big Beautiful Bill Act (OBBBA) has brought significant changes to fixed asset planning, most notably by permanently reinstating 100% bonus depreciation and eliminating the prior phaseout schedule, which would have reduced bonus depreciation to 40% for property placed in service in 2025 and eliminated it entirely by 2027. This change promises to restore the long-term stability that has been missing since the passage of the Tax Cuts and Jobs Act (TCJA). The OBBBA also introduced a new class of property, qualified production property (QPP), and allows taxpayers for the first time to immediately expense much of the cost of newly constructed or acquired facilities if they are integral to a qualified production activity. 

As businesses reassess their capital investment strategies, understanding the new depreciation rules is essential to take advantage of available tax benefits and avoid costly missteps. Eligibility for both 100% bonus depreciation and QPP expensing depends heavily on facts and circumstances. These provisions can have a substantial impact on taxable income, and fixed assets and depreciation offer broad opportunities for tax planning for a wide array of taxpayers.

Reinstatement of 100% Bonus Depreciation

Much like when 100% bonus depreciation was introduced under the TCJA in 2017, the timing of a property’s acquisition is critical under the new rules. To qualify for 100% bonus depreciation under the OBBBA, both the acquisition date and the placed-in-service date must occur after January 19, 2025. It is unclear whether the government will issue new guidance in this area; however, under existing guidance, the acquisition date for purchased assets is typically the invoice date, while for self-constructed property, this date is based on when physical work of a significant nature begins. 

Taxpayers should carefully review contract terms and payment schedules to maintain compliance. There is a common tendency to rely solely on the placed-in-service date listed in the fixed asset ledger when assessing eligibility for 100% bonus depreciation. Due to the complexity of the acquisition rules, this simplified approach can lead to material overstatements. Detailed determinations can mean the difference between claiming 40% versus 100% bonus depreciation on assets with recovery periods as long as 15 years.

In some cases, projects can be segmented so that portions of the spend qualify under the prior rules, while later expenditures may be eligible for 100% bonus depreciation. A detailed analysis is required to properly determine these breakouts.

Depreciation decisions under the OBBBA can also create ripple effects in other key areas of the tax law. Under the foreign-derived deduction-eligible income (FDDEI) and net controlled foreign corporations tested income (NCTI) rules, accelerated deductions may reduce deduction-eligible income or tested income, directly impacting FDDEI and NCTI calculations. For taxpayers with interest expense, under the OBBBA, depreciation is added back to adjusted taxable income (ATI) when calculating the Section 163(j) business interest limitation for tax years beginning after December 31, 2024. As a result, improvements capitalized under the tangible property regulations (TPR) that generate depreciation may increase ATI and increase the Section 163(j) limitation, whereas deductible repair expenses reduce ATI and are not part of the depreciation addback. These interactions highlight the importance of aligning depreciation strategy with broader tax modeling to avoid unintended consequences and help prevent benefits in one area from creating exposure in another.

Key Considerations for Bonus Depreciation Eligibility

• Eligible property includes tangible modified accelerated cost recovery system (MACRS) property with a class life of 20 years or less, computer software, qualified improvement property (QIP), and certain other property listed in Section 168(k).
• Property must be acquired and placed in service after January 19, 2025. Contract terms and acquisition timing must be reviewed closely.
• Original use or used property acquisition requirements must be met.
• Taxpayers may elect out of bonus depreciation on an asset class-by-asset class basis.

New Concepts: Qualified Production Property

The OBBBA introduced a new elective 100% depreciation allowance for QPP. These rules apply to nonresidential real property used in qualified production activity -- such as manufacturing, refining, or production -- that results in a substantial transformation of the qualified product. The property must meet additional criteria depending on whether it is constructed or acquired:

• Constructed Property
  • Construction must begin after January 19, 2025, and before January 1, 2029.
  • The property must be placed in service in the U.S. before January 1, 2031.
  • The property’s original use begins with the taxpayer. 
• Acquired Property
  • The property must be acquired after January 19, 2025, and before January 1, 2029.
  • The property must be placed in service in the U.S. before January 1, 2031.
  • The property must not have been used in a qualified production activity by another taxpayer between January 1, 2021, and May 12, 2025.
  • The property must not have been used in any way by the acquiring taxpayer prior to acquisition.
  • The property was not acquired from certain related parties or in certain types of transactions where the basis carries over from the seller.
    
    

While the focus is often on newly constructed facilities, acquired locations may also qualify if these conditions are met.

One area of uncertainty is how to treat non-production space (for example, space used for marketing or sales activities) within a facility. These areas do not qualify for QPP treatment, and there is limited guidance on how to separate non-qualified spaces from qualified areas. This may create challenges for taxpayers trying to model and plan for QPP eligibility. Different methods for allocating construction or acquisition costs across separate building areas may yield significantly different results, and these analyses go beyond a typical cost segregation study. While more guidance is expected, many taxpayers may need to claim QPP on a return before guidance beyond the statutory language is available. Taxpayers should involve a tax professional early when considering the construction or purchase of a potentially qualified facility.

Taxpayers should also remember that QIP, updated in 2017 under the TCJA, is still eligible for a 15-year recovery period and 100% bonus depreciation. QIP applies to certain interior improvements made to nonresidential buildings and can be a valuable planning tool when QPP treatment is unavailable or when improvements are made outside of production-related activities.

As the IRS continues to issue guidance, taxpayers should monitor developments closely. Businesses engaged in manufacturing, refining, or production should review current and planned projects to determine how to best leverage these new rules.