The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, delivers sweeping changes to business tax incentives. Among the most impactful are the permanent restoration of 100% bonus depreciation under Section 168(k), the creation of new Section 168(n) for expensing “qualified production property” (QPP) and a modest expansion of the Section 179 expensing thresholds. These provisions are designed to stimulate domestic investment and manufacturing, but they also introduce new complexities that require careful modeling and planning.
Permanent 100% bonus depreciation
The OBBBA permanently restores 100% bonus depreciation for qualified property acquired and placed in service after Jan. 19, 2025. This reverses the phasedown schedule enacted under the Tax Cuts and Jobs Act (TCJA), which would have reduced bonus depreciation to 40% for property placed in service in 2025 and eliminated it entirely by 2027.
The chart below illustrates the shift from the TCJA phasedown schedule to the permanent 100% bonus depreciation under OBBBA:
The reinstated provision applies to most tangible property with a recovery period of 20 years or less, including used property, as long as it meets the acquisition and use requirements. Importantly, the OBBBA does not impose new limitations on the types of property eligible for bonus depreciation, preserving the broad scope of the TCJA-era rules.
Grant Thornton insight:
This change provides long-term certainty for capital-intensive businesses and may influence the timing of acquisitions, particularly for taxpayers contemplating large-scale equipment or infrastructure investments. However, taxpayers should carefully consider the effects on other provisions, such as Section 163(j) interest limitations. For example, while for a calendar year taxpayer the timing of 100% bonus depreciation will generally match the Section 163(j) interest expense limitation shift back to tax basis EBITDA, fiscal year taxpayers may still be subject to the more restrictive EBIT limitation for their taxable year beginning in 2024 and ending in 2025, which reduces the benefit of 100% bonus.
To qualify for the increased bonus depreciation rate, property needs to have been acquired after Jan. 19, 2025. The acquisition date of property for purposes of bonus depreciation is generally the date on which a written binding contract was entered into. A contract is generally considered to be binding if it is enforceable under state law and does not limit damages to a specified amount. Treas. Reg. §1.168(k)-2(b)(5) provides additional definitions to help determine when a contract becomes binding. For smaller acquisitions such as computers or furniture, that might not be significantly different than the date the property is received and placed in service.
Grant Thornton insight:
Taxpayers with longer-term construction projects or self-constructed property will need to evaluate and document the acquisition date more carefully, perhaps by using the 10% safe harbor under the current bonus depreciation regulations in Treas. Reg. §1.168(k)-2(b)(5)(iv).
The OBBBA also includes a transition election allowing taxpayers to apply the TCJA phasedown rate (40% in 2025) for property placed in service in the first tax year ending after Jan. 19, 2025. For long-production period under Section 168(k)(2)(B) or certain aircraft under Section 168(k)(2)(C), this transitional percentage is 60%. Taxpayers also are allowed to elect out of bonus entirely for one or more classes of property in any taxable year. Both elections provide additional flexibility and planning opportunities and may be beneficial for taxpayers seeking to defer deductions or more closely align depreciation with income recognition.
Grant Thornton insight:
For corporations, net operating losses (NOLs) created after 2017 are generally limited to 80% of taxable income. By modeling future expected taxable income and capital investment, taxpayers can plan for that limitation, including by making one or more elections described above. In some cases, electing out of bonus depreciation to preserve the deduction for future years may result in a better answer than creating a NOL, the use of which is limited.
Qualified production property – a new type of deduction
The OBBBA also introduces a new provision: Section 168(n), which allows for 100% expensing of certain non-residential real property used in a qualified production activity within the U.S. This provision significantly accelerates depreciation on property that is otherwise depreciable over 39 years.
To be qualified production property (QPP) for the accelerated deduction, property must meet several criteria:
- Property must be non-residential real property.
- Construction must begin after Jan. 19, 2025, and before Jan. 1, 2029, and it must be placed in service in the U.S. before Jan. 1, 2031.
- The original use of the property must begin with the taxpayer.
- The property must be used by the taxpayer as an integral part of a qualified production activity, which includes manufacturing, production and refining of qualified products.
- Qualified products generally include any tangible personal property but do not include food that is served onsite (i.e., a restaurant does not qualify as QPP).
- Production includes only agricultural and chemical production.
- The taxpayer must elect to treat the property as QPP.
- The alternative depreciation system may not apply to such property.
Grant Thornton insight:
The statute leaves open several definitions that taxpayers may need additional guidance to interpret. The House Budget Committee report indicates that the legislative intent was to provide an incentive for manufacturing, agricultural production, chemical production, and refining to strengthen the industrial capacity of the U.S., promote capital investment and modernize and facilitate job creation. However, guidance will be necessary to provide taxpayers an understanding of how broad those qualified activities may be.
Lessors of property do not qualify for the deduction, even if the property is used by the lessee in a qualified production activity. Taxpayers may meet the “original use” and “construction date” requirements for an existing property if:
- They acquire such existing property, subject to a written binding contract, between Jan. 19, 2025, and before Jan. 1, 2029
- The property was not used in a qualified production activity between Jan. 1, 2021, and May 12, 2025, and
- The property was never previously used by the taxpayer
The statute also excludes portions of buildings used for office, administrative, engineering, research, software development, or sales functions. This exclusion requires taxpayers to carefully identify, document and segregate construction costs and qualified usage to isolate qualifying portions of a facility.
Grant Thornton insight:
Taxpayers may find it challenging to identify and allocate costs to portions of facilities used in non-qualifying activities. Even more challenging could be facilities, or portions thereof, that are used for more than one activity. For example, taxpayers may use their manufacturing line for test or sample runs of new products, which may constitute a research activity. It is unclear if limited or de minimis use of an otherwise qualified facility might cause it to be unqualified.
The provision also includes a 10-year recapture rule: if the property ceases to be used in a qualified production activity within 10 years of being placed in service, the taxpayer must recapture the benefit of the expensing. Taxpayers may want to carefully consider making a QPP election if the facility may have some de minimis non-qualified use (e.g., the single sample or test run described above), because it is currently unclear if that may cause it to not qualify and potentially trigger the recapture provision.
Grant Thornton insight:
Section 168(n) raises several interpretive questions that will require IRS guidance. For example, how broad are the qualifying activities and products? How will taxpayers substantiate the portion of a facility used in qualified production? Will partial use disqualify the entire property? Until guidance is issued, taxpayers should carefully consider documentation and cost segregation strategies.
Expansion of Section 179 expensing
The OBBBA increases the Section 179 expensing limit and phaseout threshold, though the changes are modest relative to the broader expensing provisions. The new thresholds are intended to keep pace with inflation and allow small and mid-sized businesses to immediately expense a greater portion of their capital investments.
Section 179 remains particularly useful for property types not eligible for bonus depreciation, such as certain improvements to nonresidential real property (e.g., roofs, HVAC systems and security systems). The OBBBA increases the maximum deduction from $1 million to $2.5 million and the phaseout threshold from $2.5 million to $4 million of property placed in service during the year for taxable years beginning after 2024; both amounts will be indexed for inflation for taxable years beginning after 2025.
Grant Thornton insight:
While Section 179 is often overshadowed by bonus depreciation, it remains a valuable tool for smaller businesses and for property types excluded from Section 168(k). Taxpayers should consider whether electing Section 179 treatment provides better flexibility, especially in states that conform more closely to Section 179 than to bonus depreciation.
State and local tax (SALT) considerations
Taxpayers also should consider the state tax implications, which are essential for comprehensive tax planning. Taxpayers should begin by identifying the states most relevant to their tax profile and assessing whether these states conform to or decouple from Sections 168(k) and 179 prior to and as a result of the OBBBA. Likewise, taxpayers should consider whether these states now conform to new Section 168(n) as enacted in the OBBBA.
The conformity question may be particularly challenging to analyze, because states have taken a variety of inconsistent and complex approaches to the treatment of these items, especially Section 168(k).
For example, many states, including Illinois and New York, have decoupled from Section 168(k), instead generally using slower depreciation methods. A few states, including Florida and North Carolina, have decoupled from full bonus depreciation but allow a state-specific bonus depreciation method under which the deduction is typically more accelerated than under regular, non-bonus depreciation. About one-third of the states historically have maintained consistent conformity to federal bonus depreciation.
However, a few of these states, including Louisiana, have recently decoupled from bonus depreciation to allow for automatic 100% bonus depreciation regardless of federal treatment and give taxpayers flexibility in using slower methods of depreciation if preferable.
As for Section 168(n) conformity, a solid majority of states currently conform to the provision because most states decoupling from bonus depreciation under Section 168(k) decoupled only from that specific provision, not the rest of Section 168. That said, there is a real possibility that in their next special or regular legislative session several of these states will act to decouple from Section 168(n) to maintain consistency with their current Section 168(k) conformity policy.
At the same time, it is possible that some of the states that decouple from Section 168(n) because they have not yet conformed to the Internal Revenue Code as of a date post-OBBBA enactment will conform to this provision once they have advanced their conformity date past July 4, 2025.
Finally, taxpayers also must evaluate whether elections ꟷ such as the transitional election allowing taxpayers to apply lower bonus depreciation percentages in certain situations, and the ability to elect out of bonus depreciation ꟷ are required to be followed or may be ineffective at the state level if elected for federal purposes.
Next steps
The accelerated capital recovery opportunities under 100% bonus depreciation, QPP expensing and Section 179 represent a significant shift in the landscape of capital cost recovery. The permanent restoration of 100% bonus depreciation under Section 168(k) provides long-term certainty and immediate tax benefits for eligible property, and the introduction of Section 168(n) extends a similar benefit to production-related real property, if only temporarily. Meanwhile, the expansion of Section 179 continues to support small and mid-sized businesses.
Taxpayers should begin evaluating their capital expenditure plans for 2025 and beyond to identify property eligible for immediate expensing. For production facilities, careful cost segregation of building use and documentation will be essential to substantiate eligibility for the increased deduction. Modeling the impact of accelerated deductions on taxable income, interest limitations and state conformity will be critical to optimizing the benefits of these provisions.
Contacts:
Partner, Washington National Tax Office
Grant Thornton Advisors LLC
Ellen Martin is the national leader of Grant Thornton’s Strategic Federal Tax Services business line and is located in the metro Washington DC area.
Washington DC, Washington DC
Washington, D.C.
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