Among the numerous changes that the One Big Beautiful Bill Act has brought into play, business tax incentives have experienced a major upgrade. This legislation has completely transformed Section 179 and bonus depreciation, creating opportunities to immediately deduct qualifying property purchases.
In this article, we’ll examine both tax incentives in detail, explore qualification requirements, and outline the strategic considerations that businesses need to be aware of.
Key takeaways
- The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property placed in service after January 19, 2025.
- Section 179 limits increased to $2,500,000 with a $4,000,000 phase-out threshold for qualifying purchases.
- Section 179 requires business profitability but offers flexibility in choosing which assets to expense.
- Bonus depreciation has no spending cap and can create net operating losses, benefiting businesses in various financial positions.
- To maximize these deductions, careful timing and thorough documentation of business use are necessary.
Table of Contents
- What is the Section 179 deduction?
- What is bonus depreciation?
- Major changes for 2025
- The important distinctions between Section 179 and bonus depreciation
- What property qualifies for each deduction
- Strategic considerations for business owners
- Tax planning tips for maximum benefits
- State tax implications to consider
- How Harness can help
What is the Section 179 deduction?
Section 179 delivers on a powerful promise: immediate tax savings instead of waiting years for depreciation benefits. Rather than watching deductions trickle in over time, you can deduct the entire purchase price of qualifying equipment and software in the year you start using it.
What’s more, Section 179 thresholds have received permanent increases. The deduction limit now stands at $2,500,000, while the phase-out threshold has jumped to $4,000,000 for qualified property purchases.
There is a catch, however. Unlike bonus depreciation, Section 179 requires your business to show a profit. You can’t use this deduction to create or deepen a net operating loss—a key consideration if you’re in early growth phases, or having to deal with difficult financial circumstances.
What is bonus depreciation?
Bonus depreciation also focuses on immediate cost recovery in your tax planning. The provision allows businesses to deduct a significant percentage of eligible property costs right away, instead of spreading the deduction across multiple tax years.
In what many consider the centerpiece of the One Big Beautiful Bill Act, 100% bonus depreciation has been permanently restored for qualified property acquired and placed in service after January 19, 2025. This shift reverses the previous phasedown schedule that would have seen bonus depreciation gradually disappear.
What makes bonus depreciation particularly valuable is its flexibility regarding business performance. Unlike Section 179, this incentive has no spending limits and remains available even when your business shows a net loss. For companies making substantial capital investments, weathering temporary downturns, or expanding operations, this feature can prove immensely helpful.
Major changes for 2025
The restoration of 100% bonus depreciation is a major departure from the previous schedule (which would have reduced the bonus depreciation rate to just 40% in 2025), and has profound implications for investment planning across all industries.
Section 179 thresholds have also undergone their own significant change. As mentioned, the maximum deduction has more than doubled from $1 million to $2.5 million, while the phase-out threshold leaped from $2.5 million to $4 million. These increases give businesses unprecedented new flexibility when managing their tax positions.
The introduction of “qualified production property” opens new doors for the manufacturing and production sectors. This new category allows for the 100% expensing of certain non-residential real property used in qualified production activities, providing a powerful way for businesses to manage their tax liabilities and reinvest in their operations.
The new legislation makes the timing of asset acquisition and placement into service an important factor for businesses. Property acquired and placed in service between January 1, 2025, and January 19, 2025, is subject to the previous 40% bonus depreciation rate. For all eligible property placed in service after this date, the new 100% bonus depreciation rate applies.
The important distinctions between Section 179 and bonus depreciation
While both Section 179 and bonus depreciation provide businesses with the opportunity to accelerate tax deductions on capital investments, they achieve this in very different ways. Section 179 comes with clear boundaries—a $2.5 million deduction limit and a $4 million phase-out threshold. Bonus depreciation, by contrast, has no such limits, allowing deductions regardless of purchase cost.
The treatment of business losses is another key distinction. Bonus depreciation can be used to create or increase a Net Operating Loss (NOL) for your business, which you can carry forward to future years to offset taxable income. In contrast, Section 179 takes a more conservative approach, limiting deductions to your business’s taxable income for the year, meaning you can’t use it to generate an NOL.
Asset selection flexibility varies between these provisions as well. Section 179 lets you cherry-pick which assets to expense, while bonus depreciation typically requires consistent treatment across all qualifying assets in the same class.
Additionally, Section 179 casts a wider net for improvements to nonresidential real property (such as roofs, HVAC systems, fire protection, and security systems) that bonus depreciation might exclude.
Both programs share one cautionary note, however: recapture rules. Sell an asset or reduce its business use before its recovery period ends, and you might face unexpected tax consequences. The programs also differ in their default status. Bonus depreciation applies automatically unless you opt out, while Section 179 requires an affirmative election on your tax return.
What property qualifies for each deduction
Section 179’s qualifying property roster is basically a list of business essentials. It covers tangible personal property, from machinery to office furniture, off-the-shelf computer software, and certain improvements in nonresidential real property.
Although Bonus depreciation takes a broader approach (including most equipment, machinery, computers, and specific land improvements), it’s also more defined in that it only covers property with recovery periods of 20 years or less.
However, the recent addition of qualified production property has expanded this definition. This new category allows certain non-residential real property used in manufacturing and production activities to qualify, provided its construction began after January 19, 2025.
A common thread that runs through both deductions is the business use requirement. Property must serve business purposes more than 50% of the time to qualify. Drop below this threshold, and you might trigger recapture provisions, turning your tax benefit into an unexpected liability.
Strategic considerations for business owners
For businesses operating in the red or showing minimal profit, bonus depreciation is probably the more effective choice. The provision’s ability to create or increase net operating losses provides valuable tax planning flexibility, allowing losses to offset future income when profitability returns.
Large equipment purchases may call for a hybrid approach, however. A business can maximize Section 179 up to its $2,500,000 limit, then use bonus depreciation for additional purchases.
The timing of your expected income over several years can also shape your depreciation strategy. Some businesses benefit more from accelerating deductions into the current year, while others find greater advantage in spreading them out.
For assets with a short expected holding period, greater thought may be needed. The risk of recapture can negate the tax benefits of accelerated depreciation, potentially leading to an unexpected tax liability if the property is sold or its business use declines significantly before the end of its recovery period.
Tax planning tips for maximum benefits
To strategically combine these deductions, businesses should first use Section 179 for any eligible property that doesn’t qualify for bonus depreciation—applying bonus depreciation to any remaining qualified purchases. This allows you to take advantage of Section 179’s flexibility while still benefiting from bonus depreciation’s unlimited spending cap.
Strategic timing of purchases
If your business is at risk of exceeding the $4 million Section 179 phase-out threshold, consider spreading major purchases across multiple tax years. This prevents the deduction from being diluted or lost entirely, preserving the maximum possible tax benefit.
The importance of documentation
For both construction projects and mixed-use assets, careful record-keeping is essential. For new construction, clear documentation of the acquisition date helps establish eligibility for the new 100% bonus depreciation. For assets used for both business and personal purposes, detailed logs of business use percentages are important to support your deduction claims and defend against potential IRS scrutiny.
State tax implications to consider
The complex nature of state-level regulations makes careful planning and attention to detail important parts of the equation. Many states have chosen their own path, declining to follow federal bonus depreciation rules. This divergence can prove troublesome, particularly for businesses operating across state lines.
The qualified production property provisions also introduce a level of uncertainty into state tax planning. As states grapple with these new federal rules, their responses in upcoming legislative sessions will reshape the compliance arena—and businesses are advised to stay alert to these evolving state-level positions to optimize their tax strategies.
How Harness can help
The Harness platform offers business owners a highly efficient way to manage the complexities of tax law. Instead of attempting to decode intricate regulations on your own, Harness will connect you with a trusted expert who not only understands the nuances of Section 179 and bonus depreciation but the specifics of the industry you operate in.
From determining the optimal blend of deductions for large asset purchases to maintaining compliance with state-level tax laws, a tax advisor from Harness will develop a highly personalized tax strategy for you. Get started with Harness and get the tailored tax advice your business needs to improve its financial performance.
Disclaimer:
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