The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brings significant changes to federal tax rules for businesses, especially those pertaining to bonus depreciation.
What you’ll learn
What you’ll learn
This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.
Key takeaways
- 100% bonus depreciation is now permanent for qualifying business equipment and machinery purchased after January 19, 2025
- It enables you to deduct the full cost of acquisitions in year one instead of spreading depreciation over multiple years, providing immediate tax savings and improved cash flow
- Most business equipment qualifies, including machinery, computers, office furniture, and vehicles with useful lives of 20 years or less
This guide is designed to help you better understand bonus depreciation and leverage this knowledge to improve your business’s finances. Whether you’re a new entrepreneur or a seasoned business owner, read on to better position yourself.
What is bonus deprecation?
Bonus depreciation is a tax rule that lets businesses deduct the full cost of certain assets, such as equipment and machinery, in the year acquired. Before this law, companies had to depreciate the cost of an asset over several years.
Why does the change matter?
An expense deduction reduces taxable income. So, when you immediately deduct the full cost of equipment via bonus depreciation, you can significantly cut your tax obligation. From a cash flow perspective, this is much better than gradually spreading the depreciation deductions over multiple years.
Here’s how it works in practice
“Suppose your business makes $50,000 in profit, and you buy $10,000 worth of qualifying equipment. Bonus depreciation lets you immediately subtract the full $10,000 from your taxable income. In other words, instead of paying taxes on $50,000, you’ll only pay taxes on $40,000 — which means a smaller tax bill and retaining more cash.”
— Tom Brock, CFA, CPA
What is the Big Beautiful Bill and how does it change bonus depreciation?
The Big Beautiful Bill Act (H.R.1), is a federal law that updates many parts of the tax code for both individuals and businesses. A prominent change relates to bonus depreciation, which is part of Section 168(k) of the Internal Revenue Code.
Specifically, H.R.1. stipulates the following terms:
- Permanent 100% rate: The law sets the bonus depreciation rate at 100% and makes it permanent for qualified property acquired and placed in service after January 19, 2025. The law does not apply retroactively to property purchased prior to January 19, 2025.
- No expiration date: Unlike previous law that had phase-out schedules, this rate continues indefinitely.
- Immediate tax benefits: Businesses can deduct the entire cost of qualifying equipment, machinery, and other assets in the year of acquisition. Qualifying assets generally include tangible assets with a useful life of 20 years or less.
So, how do the new rules compare with the old rules?
Comparing previous depreciation rules to the new act
The way bonus depreciation works has changed significantly over time. The Tax Cuts and Jobs Act (TCJA) of 2017 first allowed businesses to deduct 100% of the cost of qualifying property from late 2017 through 2022. After that, the rate was scheduled to decrease by 20 percentage points each year until reaching 0% in 2027. The table below tells more of the story.
| Aspect | Before OBBBA | Post OBBBA |
| Bonus depreciation rate | Phasing down (80% in 2023, 60% in 2024, 40% in 2025) | Permanent 100% |
| Expiration date | Set to expire completely by 2027 | No expiration |
| Planning certainty | Limited due to phase-out | Long-term planning possible |
“Qualifying property” refers to specific types of assets that can be depreciated under Section 168(k). This generally includes tangible property—such as equipment, machinery, and certain improvements (with a useful life of 20 years or less).
Key dates for businesses
The permanent 100% bonus depreciation rate applies to qualifying property acquired and placed in service after January 19, 2025. Only property that meets both the acquisition date and placed-in-service date criteria qualifies for the permanent rate.
Certain nonresidential real property used in manufacturing, production, or refining of tangible goods can qualify for temporary 100% bonus depreciation – if construction begins after December 31, 2024, and the property is placed in service before January 1, 2031.
Unlike previous law that specified phase-out schedules, the current law makes the 100% rate permanent for qualifying property. There is no scheduled reduction or expiration for this rate.
Qualified property and Section 179 vs. bonus depreciation
Section 179 expensing and bonus depreciation are two different ways businesses can deduct asset acquisition costs immediately, rather than over the course of several years. Both methods allow first-year deductions, but they have different rules and applications.
Section 179 expensing lets businesses deduct the cost of qualifying property up to a certain dollar limit each year. This method can be applied selectively to specific assets. The Section 179 deduction cannot create a net loss for a business; it is limited to a business’s taxable income.
On the other hand, bonus depreciation, governed by Section 168(k), has no annual dollar limit and applies automatically to all eligible assets within a certain asset class – unless a business opts out. Bonus depreciation is not limited by business income and can create a net operating loss for the year, which can be carried forward.
Common types of qualifying assets are as follows:
- Manufacturing equipment and machinery
- Computer systems and software
- Office furniture and fixtures
- Vehicles used for business (with limitations)
- Property with recovery periods of 20 years or less
The primary considerations for these two depreciation methods are as follows:
- Section 179 allows for selective application, but imposes annual dollar limitations. Moreover, the deduction cannot create a net loss for a business; it is limited to a business’ taxable income.
- Bonus depreciation has no dollar limits, but requires consistent treatment for all assets in a class. Moreover, bonus depreciation is not limited by business income and can create a net operating loss for the year, which can be carried forward.
- Strategic consideration: Section 179 offers more flexibility, while bonus depreciation typically results in larger overall deductions.
Tax planning strategies with NOL carryforwards
As noted above, bonus depreciation can create a net operating loss, which can be carried forward. You may be wondering what this means. A net operating loss (NOL) occurs when a business’ tax deductions for the year exceed its income, resulting in negative taxable income. NOLs can be carried forward to future tax years, but they can only be used to offset up to 80% of taxable income in any given year. This limitation needs to be incorporated into tax planning strategies.
Key considerations for NOL planning:
- Current year benefit: Bonus depreciation provides immediate tax savings by reducing or eliminating taxable income.
- Future limitations: NOL carryforwards can only offset 80% of taxable income in any given year.
- Cash flow analysis: Immediate tax savings must be weighed against limitations on using NOLs in future years.
Keep in mind
“Excess business loss rules apply to non-corporate taxpayers, including owners of partnerships and S corporations. These rules limit business losses that can offset non-business income like wages or investment income. When losses exceed these limits, the unused portion becomes an NOL carryforward.”
— Tom Brock, CFA, CPA
Industry insights for small and growing businesses
Bonus depreciation affects many types of businesses across a myriad of industries, particularly those that need specific equipment and technology to keep operations running smoothly. Being able to deduct full asset costs in the year of acquisition can have a really big impact on cash flow for small and growing businesses.
Below are some examples of qualifying assets for different types of businesses.
- Restaurants: Kitchen equipment, including ovens, mixers, and refrigerators qualify as do point-of-sale systems.
- Healthcare practices: Medical equipment, such as exam tables, diagnostic machines, and specialized office technology qualify.
- Manufacturing: Production machinery, including assembly line equipment and quality control instruments can be fully and immediately depreciated.
- Professional services: Computer systems, printers, and office furniture used by accountants, consultants, and legal professionals can be fully and immediately depreciated.
When businesses deduct the full cost of purchasing these types of assets in the year they’re placed in service, taxable income is reduced for that year. This results in lower income taxes and the retention of more cash, which can be used for reinvestment in operations, expansion, or enhancement of employee benefits.
How it affects limited liability companies and nonresidential real property
Limited liability companies (LLCs) are often taxed as pass-through entities, meaning the business itself doesn’t pay income tax. Rather, profits, losses, and deductions flow through to the owners’ personal tax returns based on their ownership percentages.
When an LLC claims bonus depreciation for qualified property, the deduction reduces taxable income that flows to each owner. Because of the bonus depreciation, the owners get the benefit of lower taxable income and lower taxes for the year the property is placed in service.
Nonresidential real property includes buildings and structures not used as residences — such as office buildings, retail stores, factories, and warehouses. This property typically has longer recovery periods for depreciation, often 39 years, and doesn’t qualify for standard 100% bonus depreciation.
However, the law includes a special provision for qualified production property. This category covers nonresidential real property used for qualified production activities, such as manufacturing, processing, and refining tangible goods. For this property, a temporary 100% bonus depreciation is available, if construction began after December 31, 2024, and the property is placed in service before January 1, 2031.
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What businesses can do to take advantage of bonus depreciation
To start, business owners should assess their upcoming equipment needs, identify assets that qualify for bonus depreciation, and establish a formal capital expenditure plan. Be sure to prioritize machinery, technology, vehicles, and other property with useful lives of 20 years or less. Additionally, carefully evaluate financing options in light of the fact that immediate tax deductions will increase cash flow.
Remember, tax rules around depreciation and expensing are complex and can vary, depending on business structure, state laws, and timing. Tax professionals can interpret the latest rules and model scenarios to help you optimize the financial impact of asset acquisitions.
Bonus depreciation comes with due diligence
Bonus depreciation under the Big Beautiful Bill can increase cash flow via larger tax deductions. This can facilitate new investments, business expansion, and operational improvements. To make the most of increased cash flow, it makes sense to have reliable business systems in place. Efficient payroll and HR processes allow you track employee compensation, maintain accurate records, and stay compliant with state and federal regulations. When administrative tasks run smoothly, you can focus more time and energy on the core aspects of your business.
If you’re interested, OnPay offers a free 30-day trial you can take advantage of (even if you’re already working with a payroll provider) and test drive what we offer. Best of luck as you grow your business; our team is here to answer any payroll-related questions!
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This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance.