In this last installment of our multi-part series on the One Big Beautiful Bill Act (the “OBBBA”), my colleague, George Bonini, and I discuss three provisions of the OBBBA that impact many businesses, particularly those in manufacturing and capital-intensive industries.
Bonus Depreciation
As a result of the Tax Cuts and Jobs Act of 2017 (“TCJA”), businesses were permitted to immediately deduct (or expense) 100% of the cost of certain qualifying property placed into service during the taxable year instead of depreciating the property over several years. The deduction, commonly referred to as bonus depreciation, was scheduled to phase down by 20% each year starting in 2023 and be fully eliminated by the end of 2026.
The concept of bonus depreciation is not new to our tax laws. Various iterations of the concept have been in the Internal Revenue Code (“Code”) for decades. In general, the impetus for bonus depreciation is twofold, namely: (i) to stimulate business investment in qualified property such as machinery and equipment; and (ii) to enhance the cash flow of businesses, allowing greater investment in operations, including expanding the workforce.
Under Code Section 168(k), to qualify for the TCJA’s bonus depreciation, property acquired by the taxpayer must constitute “Qualified Property.” Subject to specified exceptions, Qualified Property under the TCJA includes property that the Code assigns a depreciation recovery period of 20 years or less.