Reconciliation Bill: Key Depreciation Provisions

The special first-year depreciation allowance under IRC sec. 168(k) (commonly referred to as bonus depreciation) first appeared over 20 years ago, creating a deduction equal to 30% of the cost of eligible new property. This deduction has undergone many changes throughout the years. More recently, the Tax Cuts and Jobs Act of 2017 (TCJA) increased the deduction percentage to 100% and added a new class of eligible property. Under the TCJA, the deduction began to phase down in 2023 to 80% and was scheduled to decrease 20% each year through 2026. After 2026 the deduction would no longer have been available.

The reconciliation bill signed into law on July 4, 2025, makes substantial taxpayer-favorable changes to the bonus depreciation rules. Prior to enactment, any eligible property acquired during 2025 would have been eligible for a 40% first-year deduction. The 2025 bill increases this percentage to 100% but only for property acquired after January 19, 2025. Additionally, the 2025 bill removes the 2027 expiration date, effectively making bonus depreciation permanent.

Sec. 179 Expensing

IRC sec. 179 provides businesses with an election to expense eligible property in the year it is placed in service subject to certain limitations. Prior to the 2025 bill, the maximum amount that could be expensed as adjusted for inflation was $1,250,000. This amount was subject to a dollar-for-dollar phase out once eligible property acquisitions for the tax year exceeded $3,130,000. The 2025 bill increases these limits for 2025 to $2,500,000 and $4,000,000, respectively. The new limits will be adjusted for inflation beginning in 2026.

Qualified Production Property

The 2025 bill adds a new special depreciation allowance for Qualified Production Property (QPP). If a taxpayer places QPP into service prior to 2031, the taxpayer can elect to expense 100% of the basis of such property in the year it is placed in service. There are numerous requirements that must be met to claim this deduction. In general, the property must be located in the U.S. or any possession of the U.S and used as an integral part of a qualified production activity. Additionally, the original use of the property must begin with the taxpayer and construction of the property must begin after January 19, 2025, and before January 1, 2029. There is a limited exception to the use and construction requirements whereby a taxpayer that acquires a property during the period indicated in the previous sentence will be able to make the expensing election if the property was not previously used in a qualified production activity by anyone beginning in 2021 through May 12, 2025; the taxpayer did not previously use the property for any purpose; and the property is not acquired from certain related persons. Lessors of property are not eligible for the deduction.

Qualified production activities are limited to manufacturing, agricultural, and chemical production, and refining of tangible property. The activity will not be eligible unless it results in a substantial transformation of tangible personal property.

Only the portion of property actually used for qualified production activities will be considered QPP and, thus, eligible for the expensing election. In other words, the portion of the property used for office space, research and development activities, and any other function not integral to a qualified production activity will not be eligible.

Planning Opportunities

The bill provides taxpayer friendly changes to how businesses depreciate their fixed asset purchases and provides flexibility in the planning opportunities at both the federal and state level.  One of the major planning opportunities for taxpayers will be the utilization of cost segregation studies on the acquisition of residential and nonresidential real estate, whether it be the purchase of an existing facility or new construction.  While these studies are not new, 100% bonus depreciation will allow for an accelerated benefit.  Cost segregation studies on average will result in 10-40% of a facility’s acquisition cost being eligible for bonus depreciation in the year the facility is placed in service, which will result in 100% expensing of these eligible costs if the acquisition occurs after January 19, 2025.   In the case of QPP, cost segregations will be necessary to determine what portion of the property is used for qualified production activities in order to be eligible for the 100% expensing election.

Qualified improvement property remains unchanged under the bill which allows taxpayers to take bonus depreciation or Section 179 on most interior improvements to nonresidential real estate.  With bonus depreciation going back up to 100% and the expanded Section 179 limits, taxpayers will be able to accelerate the recovery of these often-substantial remodel costs.

Overall, these changes allow for more certainty going forward on the tax impact of future property acquisitions for all businesses, not just in real estate but in the acquisition of tangible property such as equipment, furniture, fixtures and vehicles.  Businesses are now able to better plan for acquisitions and how their cash flow will be impacted from a tax perspective.  With bonus depreciation and Section 179 both resulting in an immediate deduction in the year of acquisition at the federal level, tax practitioners have more flexibility in determining which treatment makes the most sense for the business at the state level, since states often do not conform to the federal treatment of bonus depreciation and Section 179 to varying degrees.

Conclusion

The depreciation expense changes enacted through the 2025 Reconciliation Bill are intended to incentivize investment, accelerate cost recovery and increase cash flow by providing immediate tax relief for businesses investing in depreciable property.  However, proper planning and analysis must still be performed to ensure businesses are taking full advantage of these changes. Certain business structures and industries could see their ability to utilize these accelerated costs recovery methods limited based on other areas of the tax code. With these depreciation enhancements now available, tax professionals have a critical role in guiding businesses through strategic investment and depreciation decisions that can materially improve long-term financial outcomes.

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