Since the Tax Cuts and Jobs Act (TCJA) in 2017, there has been a yearly struggle with the amount of depreciation allowed for new business purchases. At the start of this decade, businesses could generally deduct 100% of new machines, cars, tech, furniture, etc. This full write-off has been slowly eliminated over the last few years, but with the recent bill, it is back to 100%. While bonus depreciation does not technically increase your deductions, reordering when you receive deductions for large purchases can be extremely helpful.
What is Bonus Depreciation?
When your CPA tells you to go buy a new truck by the end of the year, this is why. In 2017, the TCJA introduced a temporary 100% bonus depreciation for new business investments. Instead of a normal annual deduction over a certain number of years, Congress allowed certain business expenses to be fully deducted in the year it was purchased. Therefore, if for other reasons you were searching for additional deductions, buying a $70,000 truck for the company could produce a $70,000 deduction.
Depreciation is a loaded word, since there are many types of depreciation. There are important distinctions between this revived bonus depreciation and, say, Section 179 deductions. More or less, Congress has allowed small business owners to deduct their purchases entirely in the first year anyway through Section 179 deductions, but with two major limitations. First, for 2025, the maximum deduction possible is $1.25 million. Second, the deduction cannot exceed your business income. Bonus depreciation was essentially created for investments that do not meet the criteria for Section 179 deductions, and primarily does not have either of these two main limitations. It is as if Congress is “stepping on the gas” for business owners to invest in their business.
It is also important to note that these deductions generally exclude real estate. More specifically, both deductions were designed for assets with less than a 20-year lifespan. Since most residential and commercial properties are deducted over 20-30 years, they generally do not qualify. There are always exceptions, so work with your CPA to understand the intricacies of these depreciation schedules. Ultimately, there are many rules that could allow you to deduct your business purchases completely, if done correctly.
Moving the Goal Posts
Bonus depreciation is essentially a way for Congress to further incentivize business investment. In the past, it has been a temporary measure to sweeten the pot for owners in addition to what they already get through Section 179 deductions. That temporary measure has been decreasing over the last few years, whereas the expectation was only a 40% bonus depreciation for 2025, 20% in 2026, and no deduction in 2027. However, with the new One Big Beautiful Bill Act (OBBBA), Congress made 100% bonus depreciation permanent.
In addition to the permanent bonus depreciation, the Section 179 deduction limitations were raised as well. Starting in 2025, up to $2.5 million in deductions can be claimed in the year the new assets were purchased. Between the two different deduction types, it is fairly likely that most small business owners could deduct the full cost for many of the large purchases each year.
Two Smart Ways to Use the New Rules
Given the technical rules now that OBBBA is official, there are a few strategies that small business owners could use to maximize these deductions:
First, bunch expenses into one year. Let’s say an owner is expecting to buy a new truck by the end of the year, and likely another one sometime early next year. Assuming the trucks are the same, and all else is equal, you likely will get a deduction for the full value of the truck both this year and next. But imagine if your tax rate this year is 35% and your tax rate next year is 25%. Simple math would say to buy both trucks this year, so both deductible expenses apply to the 35% rate instead of the 25% rate.
Second, real estate is a large part of many owners’ personal and business assets. Especially with investment properties, a cost segregation study for newly purchased properties can be extremely valuable. In general, newly owned real estate cannot apply to Section 179 or Bonus Depreciation. However, a cost segregation study specifically breaks down the multi-decade depreciation schedule of the property into smaller chunks. For example, recategorizing only the HVAC system to a 10-year schedule, or the flooring to a 5-year schedule, would classify those specific assets within the 20-year limitation and become eligible for bonus depreciation or Section 179 deductions. So, while you likely cannot deduct the entire purchase of the property in the first year, it may be possible to deduct 20-40% through a cost segregation study using bonus depreciation (depending on your situation).
Ultimately, both strategies and both deductions are fairly technical tax planning topics. It is vital to check each idea or purchase with your tax advisor to verify that your expectations are true.
Deductions Are Just Deductions
Taxes in a vacuum are static facts that you and your business must adhere to. However, tax planning can certainly take topics like Bonus Depreciation and use them for your advantage. Understanding how these deductions work can certainly help you make decisions within the business, but do not let your tax situation run your business. Focus on the vision and execution of the company first, then attempt to rearrange the pieces in a more optimal manner. Lean on your financial team to help you with the latter so you can spend more time on the former.
TC Falkner 