Unlocking Tax Opportunities: 100% Bonus Depreciation and Qualified Production Property Expensing

The revival of bonus depreciation as a cornerstone of U.S. tax legislation marks a pivotal step in bolstering economic growth. Originally enhanced by the 2017 Tax Cuts and Jobs Act (TCJA), its reintroduction under the "One Big Beautiful Bill Act" ensures a 100% bonus depreciation rate, highlighting its strategic importance, particularly in the wake of the pandemic's economic impact. This comprehensive guide delves into the tax advantages, historical context, criteria, and recent legislative modifications concerning bonus depreciation, with a focus on its application to qualified production property.

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  • Historical Perspective: Economic Stimulus Origins - Introduced by the Job Creation and Worker Assistance Act in 2002, bonus depreciation initially allowed businesses to deduct a significant portion of qualifying property costs upfront. Initially set at 30%, it increased to 50% and later to 100% during economic slowdowns.

    The TCJA notably modified bonus depreciation, enabling a 100% first-year deduction for qualifying property to stimulate economic growth. However, a sunset provision started phasing out this benefit in 2023, and it was set to disappear by 2027.

  • Benefits of Bonus Depreciation - Bonus depreciation provides immediate tax relief by allowing full deductions of asset costs in the service year, boosting cash flow and encouraging investments. However, strategic usage necessitates careful tax planning. For instance, the Section 199A deduction, related to qualified business income (QBI), can be affected by large capital write-offs, potentially reducing the Sec 199A deduction. Conversely, lower taxable income might bypass phase-outs in the 199A deductions.

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  • Eligibility for Bonus Depreciation - Generally, qualifying property includes tangible property with a recovery period of 20 years or less, computer software, water utility property, and certain improvements and productions. Business vehicles and most office equipment have recovery periods of 5 and 7 years respectively, while real property is ineligible due to its longer recovery periods.

    The TCJA broadened eligibility to include used property, though public utility and dealer properties are exceptions, creating added complexity.

  • Challenges with Qualified Improvement Property - Legislative hurdles initially prevented properties such as leasehold and restaurant improvements from qualifying for bonus depreciation under a 15-year MACRS period until corrected by the CARES Act.

  • Opting Out and AMT Considerations - Revocation of bonus depreciation typically requires IRS approval, though timely filed returns permit revocation within six months via amendments. Bonus-depreciated property is exempt from alternative minimum tax (AMT) adjustments, aligning it with standard tax advantages.

  • Automobiles and Additional Depreciation Rules -Specific deduction limits apply to "luxury autos." The TCJA increased depreciation limits by $8,000 during eligible years. Section 179 rules add complexity, necessitating pre-bonus adjustments.

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  • Legislative Updates and Solutions - The OBBBA maintains a 100% bonus depreciation rate for qualified property post-January 19, 2025, making it permanent. Property placed between January 1 and January 19, 2025, retains a 40% rate. This offers businesses long-term planning capacity, aligning with policies for economic growth.

  • Qualified Production Property - The OBBBA enhances U.S. manufacturing by allowing 100% deductions for certain new factories, improvements, and structures post-July 4, 2025, up to the end of 2030. Criteria include domestic use, initial taxpayer usage, and specific construction timelines. Some property functions, such as administrative activities, are ineligible.

  • Machinery and Production Activities -While non-qualified production machinery may lack specific expensing benefits, they qualify for the reinstated 100% bonus depreciation.

  • Defining Qualified Production Activity - Activities must transform property significantly, excluding certain food and beverage sales. Recapture rules apply if property usage changes within ten years, converting gains to ordinary income.

The re-emergence of bonus depreciation is crucial for revitalizing the economy, offering businesses vital tax incentives for investing in capital assets. While it presents substantial benefits, strategic planning around QBI deductions, AMT implications, and eligibility is essential. As a cornerstone of economic strategy, bonus depreciation encourages enduring economic growth, particularly for small and large-scale manufacturing. If you have queries about maximizing Bonus Depreciation for your business, contact our office for professional guidance.

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