If you file joint returns with your spouse, count both your business income and your spouse’s business income (if any). If you own an interest in a partnership, an LLC that’s treated as a partnership for tax purposes or an S corporation, things can become complicated, because the Sec. 179 deduction limitations apply at both the entity depreciation strategies under the new tax law level and your personal level. For eligible assets placed in service in tax years beginning in 2025, the OBBBA increases the maximum amount that can immediately be written off via first-year depreciation (sometimes called expensing) to $2.5 million. For certain assets with longer production periods, these percentage cutbacks were delayed by one year. For example, a 60% first-year bonus depreciation rate applies to long-production-period property placed in service between January 1, 2025, and January 19, 2025. The OBBBA increases the Section 179 expensing limit and phaseout threshold, though the changes are modest relative to the broader expensing provisions.
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Prior to the bill, these assets were specifically identified as 5-year property for the purposes of depreciation. The amount of recapture can vary depending on several factors, including the original cost of the property, the amount of depreciation taken, and the sale price of the property. While straight line depreciation is also subject to recapture, it is taxed at the capital gains rate, while accelerated depreciation taken is taxed at ordinary income rate. Cost segregation remains a powerful tax strategy for real estate owners—but with the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, there are some important updates that could affect how you plan, depreciate, and recapture assets. These recent changes to depreciation rules represent a significant opportunity for businesses to optimize their tax strategies and accelerate investment.
Termination of Cost Recovery for Energy Property
However, the intricacies of each provision, including specific eligibility criteria, coordination rules, and effective dates, necessitate careful analysis. Taxpayers will see favorable changes to Section 174(d) for domestic research costs and flexibility to accelerate the deduction of unamortized domestic research costs capitalized under the 2017 Tax Cuts and Jobs Act. An example of such a pattern would be a construction company that normally replaces trucks and other equipment as necessary. With accelerated depreciation, it now could buy new equipment that costs less to operate and increases its margins—with less after-tax costs than a piecemeal approach. If you actively participate in a rental property, you may be able to count the net rental income.
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There are some exceptions to the limit, and some businesses can elect out of this limit. Disallowed interest above the limit may be carried forward indefinitely, with special rules for partnerships. With the potential for further changes on the horizon through the regulatory process, it’s more important than ever to understand, analyze, and act. By breaking down complex topics, highlighting key timelines, and offering fresh perspectives, this edition is designed to help you prepare – not just for today, but for the weeks and months ahead.
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However, given economic uncertainties, investors should focus on cash flow management, market research, and tax strategy in making decisions about the right investment vehicle for you. When combined with accelerated depreciation from cost segregation, bonus depreciation at any rate can lead to significant first-year deductions. For instance, a properly conducted cost segregation study on newly acquired or constructed property can produce six- or seven-figure deductions, improving return on investment and releasing capital for reinvestment. Take Another LookThese are just a few of the key business provisions introduced in the OBBBA.
In some cases, taxpayers may be able to leverage a cost segregation study or fixed asset specialists to determine if the property can still qualify for a shorter recovery period based on existing case law and regulations applicable generally to fixed assets. Any qualified property placed in service on or after January 19, 2025 is now eligible for full first-year expensing. This includes short-lived assets identified in a cost segregation study—like specialty lighting, plumbing, electrical components, and flooring. For certain assets with more extended production periods, those phase-downs were delayed by one year. For example, a 60% bonus depreciation rate applies to long-production-period property placed in service between January 1 and January 19, 2025. Under Scenario A (100% bonus), XYZ keeps $210k in cash (that it would have paid in taxes under normal rules) and can reinvest that cash now.
It is important to note that taxpayers are still required to capitalize and amortize foreign R&E expenditures over 15 years. Starting in 2025, companies can fully expense up to $2.5 million in qualifying assets, with phaseouts beginning at $4 million, both indexed for inflation. A taxpayer can expense the cost of qualified assets and deduct a maximum of $500,000, with a phaseout threshold of $2 million. This blog breaks down what cost segregation recapture is, how it works, and what has changed (or stayed the same) under the OBBBA. If you’re investing in commercial property, this is a critical piece of your tax planning puzzle. These changes signal yet another evolution in the tax landscape – one that presents both immediate opportunities and long-term planning considerations.
- There are some exceptions to the limit, and some businesses can elect out of this limit.
- It also modifies the definition of section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property.
- Either way, it’s very important to have a good estimate of your home’s fair market value on the date of the conversion.
- When assets that have been depreciated over an accelerated schedule are sold, a portion of the gain is taxed as ordinary income, to the extent of the depreciation claimed, rather than the lower capital gains rates.
Who Benefits From 100% Bonus Depreciation in Real Estate
Visit firstncc.com to discover how we can turn enhanced depreciation into your competitive advantage. The complexity and magnitude of OBBB’s depreciation benefits demand sophisticated financing strategies that traditional lenders often cannot accommodate. First National Capital specializes in equipment-backed financing structures that maximize the value of enhanced depreciation benefits. This $1.89 million improvement in immediate cash flow represents a 12.6% reduction in effective equipment cost, fundamentally altering the project’s economics and enabling more aggressive growth strategies. Tax advisors can work with clients to assess eligibility, model tax outcomes and coordinate with tenants to ensure the property’s use aligns with QPP requirements. QPP is treated as a separate asset class, and taxpayers must make a formal election to claim the deduction.
- First-year bonus depreciation can also be claimed for real estate qualified improvement property (QIP).
- The 2025 tax reform repeals the Section 179D Energy Efficient Commercial Building Deduction for projects that begin construction after June 30, 2026.
- Unless or until Congress passes a technical correction bill, QIP is ineligible for bonus, and it remains firmly among 39-year assets unless accelerated to 5- or 7-year class lives through a Cost Segregation Study.
- A few states, including Florida and North Carolina, have decoupled from full bonus depreciation but allow a state-specific bonus depreciation method under which the deduction is typically more accelerated than under regular, non-bonus depreciation.
The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017. The One Big Beautiful Bill Act of 2025 (HR 1) implements sweeping changes to tax rules for fixed assets and energy-efficient projects. Knowing what they are and how they can impact your business can help in finding the best possible tax position for your situation. Below, we outline key modifications related to depreciation, cost recovery and tax credits that businesses should note. Dozens of tax benefits that were previously expired or were set to expire at the end of this year will now continue for both businesses and individuals, thanks to sweeping new legislation signed into law by President Donald Trump on July 4, 2025.
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Review past returns with your tax professional to seek retroactive refunds if eligible. The Act temporarily increases the state and local tax (SALT) deduction cap to $40,000 from 2025 through 2029. The Act increases the Advanced Manufacturing Investment Credit (Section 48D) from 25% to 35% for property placed in service after December 31, 2025, enhancing incentives for U.S. manufacturing investments. These changes apply to businesses with tipped employees and to payors processing contractor or platform payments, increasing reporting complexity.
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