We knew that Congress was going to potentially make some sweeping changes to depreciation deductions for 2025 in the new spending bill. As you may recall, the changes to bonus depreciation deductions in 2023 and 2024 reduced the available depreciation for small businesses, and we were expecting those reductions to be reversed.
The recent enactment of OBBBA includes several significant changes to the tax rules regarding depreciation and the expensing of business property. Here they are:
Bonus Depreciation Deduction:
- Under new law, 100% bonus depreciation has been made permanent for property acquired after January 19, 2025 (oddly enough, Inauguration Day). There is currently no plan for the bonus deduction to phase down or be reduced in future years like we saw with the previous law.
- Remember that bonus depreciation can create or increase a net loss. Your bonus depreciation deduction isn’t limited to your company’s taxable income, in other words.
Section 179 Depreciation Deduction:
- Under new law, the Section 179 expensing limit is raised to $2,500,000, with the phase-out threshold raised to $4,000,000.
- These amounts will be indexed for inflation in future years.
- Remember that you cannot create a loss with a Section 179 deduction.
As we have done in the past, we will advise you on whether bonus depreciation or Section 179 depreciation is the best option based on the factors unique to your business. For example, states are not required to conform to the new depreciation laws, so we will review your state’s position on this as soon as we can and choose the best option for you, then present it to you for confirmation.
Lastly, we do not generally advise clients to purchase new equipment just to obtain a tax deduction. However, should you decide to purchase new equipment, we will analyze the impact and advise you accordingly. We feel that purchases of new equipment should be made with cash flow as the top priority, not tax deductions. Remember that your deduction saves you an amount commensurate with your effective tax rate, so spending $1 to save $.20 needs to be carefully examined.
Please remember that these tax law changes are brand new, and clarification is coming over the next few months. We are providing this guidance based on our understanding of the law as it is written, but the facts could change as we learn more. Please do not make changes to your income or tax position solely based on this blog post, as it is not considered to be tax planning advice. Make sure to consult your tax professional if you have specific questions about your situation.