The One Big Beautiful Bill Act (OBBBA) gives the go-ahead to small business owners to buy qualified property to use in their business operation. Under the new law, two major depreciation-related tax breaks—the Section 179 deduction and first-year bonus depreciation—are permanently preserved and enhanced.
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
1. Section 179: Under Section 179 of the tax code, a business may “expense” or currently deduct the cost of qualified new or used business property, up to an annual limit. Qualified property includes business property with a cost recovery period of 20 years or less, depreciable software that is not amortized over 15 years, qualified leasehold improvements and water utility property.
The annual limit has been increased gradually in spurts. The major law prior to the OBBBA—the Tax Cuts and Jobs Act (TCJA)—established a limit of $1 million, with inflation indexing. But there a couple of key restrictions.
- The Section 179 deduction can’t exceed a taxpayer’s net taxable income from their business activities. For example, if a business generates $750,000 in taxable income in 2025, the deduction is limited to $750,000, even if the business spends as much as $1 million or more on the purchases of qualified depreciable assets.
- The maximum Section 179 deduction is reduced dollar-for-dollar above a threshold of $2.5 million, with inflation indexing. This threshold has been increased in lockstep with the annual expensing limit.
Now the OBBBA boosts the annual Section 179 deduction limit to $2.5 million for 2025 and makes it permanent. Plus, the phase-out threshold jumps to $4 million. These limits will be indexed for inflation, beginning in 2026.
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2. Bonus depreciation: The TCJA authorized a 100% first-year bonus deduction for qualified property placed in service during the year and extended it to used, as well as new, property. The deduction is available for assets like computers, vehicles, off-the-shelf software, machinery and equipment, and office furniture.
However, the bonus depreciation deduction is subject to a phase-out over a five-year period, beginning in 2022. It is 40% for 2025. The deduction was scheduled to disappear completely after 2026.
The OBBBA restores the bonus depreciation deduction and makes it permanent. It reinstates 100% first-year bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
As a result, a small business can generally elect to claim the Section 179 allowance or first-year bonus depreciation, or both, if it qualifies. When a Section 179 deduction is combined with bonus depreciation, the Section 179 deduction is calculated first and then bonus depreciation applies to the remainder.
Note that certain special rules may affect these depreciation-related deductions. For example, the tax law imposes other limits on business deductions for vehicles. Bottom line: Work with your clients to maximize the available tax benefits.
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