The One Big Beautiful Bill Act of 2025 (HR 1) implements sweeping changes to tax rules for fixed assets and energy-efficient projects. Many taxpayers will see a mixed bag of good and bad provisions in the new legislation. Knowing what they are and how they can impact your business can help in finding the best possible tax position for your situation. Below, we outline key modifications related to depreciation, cost recovery and tax credits that businesses should note.
Key Takeaways
- Depreciation rules for certain energy properties have been amended, affecting properties where construction had not begun by December 31, 2024.
- 100% bonus depreciation is back — and permanent.
- There’s a new method for taxpayers to take additional deductions on qualified production property.
- The provision computing adjusted taxable income (ATI) without having to reduce the ATI amount for depreciation or amortization has been permanently restored.
Termination of Energy Efficient Commercial Buildings Deduction
Section 70507 terminates Section 179D deductions for properties that begin construction after June 30, 2026. While this still leaves time to take advantage of the current provision and realize significant tax savings, taxpayers may want to evaluate if it’s beneficial to commence construction prior to June 30, 2026.
Termination of Cost Recovery for Energy Property
Section 70509 amends Section 168(e)(3)(B)(vi), altering depreciation rules for certain energy property, such as solar panels, wind turbines and other renewable energy assets.
This amendment will be effective for those assets where the construction of the property begins (or begun) after December 31, 2024. Prior to the bill, these assets were specifically identified as 5-year property for the purposes of depreciation. As 5-year property, the assets would be eligible for bonus depreciation.
While this amendment makes the depreciable lives of these assets less clear, it doesn’t specify that they must be treated as 27.5 or 39-year property. In some cases, taxpayers may be able to leverage a cost segregation study or fixed asset specialists to determine if the property can still qualify for a shorter recovery period based on existing case law and regulations applicable generally to fixed assets.
Full Expensing for Certain Business Property (the Return of 100% Bonus Depreciation)
Section 70301 brings back 100% bonus and makes it permanent. The new provision has no phase-out, meaning businesses can continue to claim a substantial upfront deduction.
The new bonus provision is effective for property acquired and placed into service after January 19, 2025. The acquisition date is determined by the date on which a written binding contract is entered into for such acquisition. As an example, if a taxpayer were to have a signed purchase agreement to purchase a building prior to this date, they would still need to use the bonus rates from the Tax Cuts and Jobs Act (TCJA) even if the building were to be placed in service after the effective date. Self-constructed property acquisition dates can be the date on which physical work of a significant nature begins, or the date on which the taxpayer incurs more than 10% of the total cost of the property (excluding land), excluding preliminary activities such as planning or securing financing.
Special Depreciation Allowance for Qualified Production Property (QPP)
Section 70307 adds Section 168(n) with a new method for taxpayers to take additional deductions on QPP.
This new section will allow a depreciation deduction of 100% on nonresidential real property that otherwise would have been depreciated over 39 years. This is an election available for property constructed after January 19, 2025, and before January 1, 2029. It must also be placed in service after July 4, 2025, and before January 1, 2031.
Under the new law, the production property must be used by the taxpayer. Lessors can’t take advantage of the QPP bonus depreciation. It’s specifically applied to areas of the building that are integral to manufacturing, production or the refining of tangible personal property. Office space, restrooms, research areas and other non-manufacturing activity spaces are excluded.
In addition, they’ve provided a way for existing buildings to qualify for the 100% bonus following the same placed in service dates and applying the acquisition requirements. If the purchased property wasn’t previously used by the taxpayer; wasn’t used in a qualifying activity from January 1, 2021, to May 12, 2025; and wasn’t purchased from related parties, it will be considered QPP.
If bonus depreciation is taken on qualified property under this section, it must stay in use performing qualified activity for 10 years. If there’s a change in use to the property within ten years, there’s a recapture provision relating to the excess depreciation. This excess depreciation will be recaptured at the ordinary income rate.
We expect to see further guidance related to this new section. In the absence of additional guidance, performing a cost segregation study to properly determine the basis amount that qualifies would create documentation and substantiation of costs that are eligible for 100% bonus.
Business Interest Deduction Limit
Section 70303 permanently restores the provision computing adjusted taxable income (ATI) without having to reduce the ATI amount for depreciation or amortization. This applies to taxable years beginning after December 31, 2024.
The TCJA restricted business interest deductions generally to 30% of ATI starting in 2018 if you were a taxpayer that wasn’t considered a small business under Section 163(j). Prior to 2022, taxpayers subject to Section 163(j) would be allowed to add back depreciation and amortization in their computation of ATI, thereby increasing their business interest expense deduction. Beginning in 2022, depreciation and amortization were factored into the ATI computation, thereby reducing the business interest expense deduction.
The provision makes the rules for Section 163(j) on par with what they were before 2022.
The One Big Beautiful Bill Act presents a mixed landscape for businesses with fixed assets. This is a great time to hone planning for 2025 and beyond. Working with a knowledgeable professional to navigate the new law can help businesses maximize their tax savings.
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