Highlighting Changes on Bonus Tax Depreciation

Full expensing (100% bonus depreciation) has been made permanent for qualified business property acquired and placed in service after January 19, 2025. This change is a result of the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025. The OBBBA also introduces a new, temporary 100% bonus depreciation for "qualified production property" where construction begins after December 31, 2024, and which is placed in service before January 1, 2034. This type of property is typically nonresidential real property used in manufacturing, production, or refining of tangible personal property. 

Historically, 100% bonus depreciation under the Tax Cuts and Jobs Act (TCJA) was available for qualifying property placed in service between September 28, 2017, and December 31, 2022. The rate then phased down to 80% in 2023, 60% in 2024, and 40% in 2025. 

• The OBBBA permanently reinstated 100% bonus depreciation for most qualified property acquired after Jan. 19, 2025. This includes tangible property with a class life of 20 years or less, consistent with prior bonus depreciation rules.

  Importantly, property acquisitions for which a written binding contract was entered into before Jan. 20, 2025, is treated as acquired on written binding contract date, which may cause otherwise eligible property to not be eligible for the expanded 100% bonus depreciation.

  
  

  In addition, the OBBBA introduces a new, temporary full expensing provision for “qualified production property”—a category of building property typically excluded from bonus depreciation due to its 39-year class life. To qualify, the property must meet all of the following criteria:

  
  

  • Used by the taxpayer as an integral part of a qualified production activity

  • Placed in service in the United States, or any possession of the United States

  • Its original use commenced with the taxpayer

  • Construction began after Jan. 19, 2025, and before Jan. 1, 2029

  • Designated by election

  • Placed in service before Jan. 1, 2031

    
    

  Notably, leased property does not qualify, and portions of buildings used for nonproduction purposes (e.g., offices, research and development, sales) are excluded. A special rule allows certain used property to qualify if it hasn’t been used in a production activity since Jan. 1, 2021.

  
  

• The return of 100% bonus depreciation means that capital investments—whether in machinery, equipment, or qualifying facilities—can be deducted in full in the year they are placed in service. This can significantly reduce taxable income and improve after-tax cash flow, freeing up capital for reinvestment or other strategic uses.

  
  

• The new provision for qualified production property is significant for manufacturers, refiners, and producers. It opens the door to fully expense the cost of constructing or acquiring production facilities—an option that was previously unavailable.

  
  

• However, the benefits come with complexity. Businesses must carefully assess whether their property qualifies, especially when it comes to mixed-use buildings or repurposed facilities. The 10-year recapture rule also means that if the property ceases to be used in a qualified production activity, some of the tax benefits may be clawed back.

  
  

Coordination with Other Tax Provisions Bonus depreciation interacts with other tax provisions, like the Section 179 deduction, notes U.S. Bank. Businesses should consider how these deductions can be used together to maximize tax benefits. The OBBBA also made permanent the EBITDA-based limitation under Section 163(j) for deducting business interest, which may be relevant for businesses utilizing significant depreciation. 

• Restoration of the EBITDA-Based Limit: The OBBBA permanently reinstates the EBITDA-based Adjusted Taxable Income (ATI) calculation for Section 163(j) limitations, allowing businesses to include depreciation and amortization deductions when determining their interest expense ceiling. This change is effective for tax years beginning after December 31, 2024.

  
  

• Impact on Businesses with Significant Depreciation: Prior to this change, beginning in 2022, the ATI calculation excluded depreciation and amortization, tightening the interest deduction limit and especially impacting capital-intensive industries like manufacturing, real estate, and technology. The restoration of the EBITDA-based calculation offers relief to these businesses by providing a higher interest deduction limit.

  
  

• Shift from EBIT to EBITDA: The earlier shift to an EBIT (Earnings Before Interest and Taxes) standard for ATI calculations was seen as restrictive, potentially hindering investment and economic growth, according to the U.S. Chamber of Commerce. Returning to an EBITDA-based approach is considered more favorable for businesses.

  
  

• Interaction with Depreciation and Investment: The permanent 100% bonus depreciation also enacted by the OBBBA further enhances the benefit of the EBITDA-based interest deduction limit, as businesses can deduct the full cost of certain property in the year it's placed in service, generating significant depreciation deductions.

  
  

• Changes to Interest Capitalization: The OBBBA also modified the treatment of electively capitalized interest, requiring that such interest retains its character and remains subject to the Section 163(j) limitation for tax years starting after December 31, 2025. This removes a planning tool previously used by some businesses to manage their taxable income and interest deduction timing. 

• Background:

  • Prior to 2022, Section 163(j) (enacted under the Tax Cuts and Jobs Act) limited business interest expense deductions to 30% of EBITDA, which includes earnings before interest, taxes, depreciation, and amortization.

  • Starting in 2022, the calculation shifted to EBIT, which is earnings before interest and taxes, removing the add-back for depreciation and amortization.

• The OBBBA's Impact:

  • For tax years beginning after December 31, 2024, the OBBBA reinstates the EBITDA-based limitation, meaning that depreciation, amortization, and depletion are once again added back to taxable income when calculating ATI.

  • This change is generally favorable for businesses, particularly capital-intensive ones, as it allows them to deduct a larger amount of interest expense compared to the EBIT-based method. 

    
    

In essence, the OBBBA provides a more flexible approach to the interest deduction limitation under Section 163(j) by restoring the add-back for depreciation and amortization, according to RSM. This means that many companies will be able to deduct significantly more interest expense than they would have under the stricter EBIT-based calculation. 

Here's an evolution of Tax Law Changes summarized herein:

https://www.grantthornton.com/insights/alerts/tax/2025/legislative-updates/obbba-business-and-individual-provisions#business-provisions

Impact on your valuation model-

• Effective tax rate reduction: Bonus depreciation reduces the cost of capital and lowers the effective tax rate by allowing businesses to deduct capital expenditures more quickly.

• Increased after-tax cash flow: By accelerating tax deductions, bonus depreciation increases after-tax cash flow in the year the property is placed in service.

• Reduced taxable income: Businesses can deduct the full cost of eligible investments in the year they are placed in service, thereby significantly reducing taxable income.

• NOL considerations: Bonus depreciation can potentially create a net operating loss (NOL) which can then be carried forward to offset future taxable income.

• Valuation model adjustments: When using discounted cash flow (DCF) valuation methods, the impact of bonus depreciation on after-tax cash flows needs to be carefully considered. This may require extending the projection period of DCF models to capture the full effect of these changes.