The One Big Beautiful Bill Act (OBBBA) included favorable changes to the federal income tax rules for depreciating business assets. And there are annual inflation adjustments to keep track of as well. Here's an update on the first-year depreciation rules for yet-to-be-filed 2025 federal income tax returns and the 2026 tax year.
100% First-Year Bonus Depreciation Is Back
The OBBBA restored 100% first-year depreciation for eligible assets acquired and placed in service after January 19, 2025. Under the pre-OBBBA rules, 100% first-year bonus depreciation was last allowed for eligible assets placed in service in 2022, but the deduction percentage was generally reduced to:
• 80% for 2023,
• 60% for 2024 and
• 40% for eligible assets placed in service in 2025 on or before January 19, 2025.
Eligible assets include most depreciable personal property, such as equipment, computer hardware and peripherals, certain vehicles and commercially available software.
Important: For property eligible for first-year bonus depreciation that's placed in service during the first tax year ending after January 19, 2025, taxpayers can elect 40% first-year bonus depreciation rather than 100% first-year bonus depreciation.
Improved Sec. 179 First-Year Depreciation Rules
For eligible assets placed in service in tax years beginning in 2025, the OBBBA increased the maximum amount that can immediately be written off via first-year Section 179 deductions to $2.5 million. A phaseout reduces the maximum Sec. 179 deduction if, during the year, the taxpayer places in service eligible assets in excess of $4 million. These increased OBBBA amounts are adjusted annually for inflation for tax years beginning in 2026 and beyond. For 2026, the inflation-adjusted numbers are $2.56 million and $4.09 million, respectively.
For Sec. 179 deductions, eligible assets include most depreciable personal property, such as equipment, computer hardware and peripherals, commercially available software and certain vehicles. Sec. 179 deductions can also be claimed for real estate QIP. In addition, Sec. 179 deductions are allowed for roofs, HVAC equipment, fire protection and alarm systems and security systems for nonresidential real property. Finally, Sec. 179 deductions can be claimed for depreciable personal property used predominantly in connection with furnishing lodging.
There's a special limit on Sec. 179 deductions for heavy sport utility vehicles (SUVs). It applies to SUVs with gross vehicle weight ratings between 6,001 and 14,000 pounds that are used over 50% for business. For tax years beginning in 2025, the maximum Sec. 179 deduction for heavy SUVs is $31,300. For 2026, the inflation-adjusted maximum is $32,000.
Sec. 179 deductions are subject to various limitations that don't apply to first-year bonus depreciation. In particular, things can get tricky for businesses that operate as partnerships, S corporations or limited liability companies treated as partnerships for tax purposes. In general, businesses should claim 100% first-year bonus depreciation to the extent allowed rather than claiming Sec. 179 deductions for the same assets. However, your SSB tax advisor can help determine the most advantageous mix of bonus depreciation and Sec. 179 deductions based on your business's income, entity type and state tax rules.
100% First-Year Depreciation for Qualified Production Property
The OBBBA established a new 100% first-year depreciation break for nonresidential real estate that's classified as qualified production property (QPP). This is defined as the portion of any nonresidential real estate that's used by the taxpayer for a qualified production activity. A qualified production activity involves the manufacturing, production or refining of qualified products. To cut to the chase, QPP generally means factory buildings.
Before the OBBBA, nonresidential buildings, including factory buildings, generally had to be depreciated over 39 years. The new 100% first-year depreciation break for QPP is available for properties whose construction begins after January 19, 2025, and before 2029. The property generally must be placed in service in the United States or a U.S. possession before 2031, and its original use generally must commence with the taxpayer.
100% First-Year Bonus Depreciation for Eligible Heavy Vehicles
Under the OBBBA, 100% first-year bonus depreciation is once again allowed for qualifying new and used property that's acquired and placed in service after January 19, 2025. This break can significantly benefit first-year depreciation deductions for heavy vehicles used more than 50% for business.
Bonus depreciation is available only when the SUV, pickup or van that you buy has a manufacturer's gross vehicle weight rating above 6,000 pounds. Examples of suitably heavy vehicles include the Chevy Tahoe, Ford Explorer, Toyota Sequoia and lots of long-bed pickups. Both new and used vehicles are eligible for this break if they meet all the other requirements.
For example, suppose you buy a new $85,000 heavy SUV after January 19, 2025, and use it 100% for business. Under the 100% first-year bonus depreciation break, you can deduct the entire $85,000 cost in the first year it's placed in service.
Limits for Luxury Business Vehicles
The so-called luxury auto depreciation limits apply to "passenger autos" with a gross vehicle weight rating of 6,000 pounds or less. For passenger autos placed in service in calendar year 2025, the maximum luxury auto depreciation deductions are:
• $20,200 in the first year if first-year bonus depreciation is claimed, or $12,200 if bonus depreciation isn't claimed,
• $19,600 in the second year,
• $11,800 in the third year and
• $7,060 for all subsequent years until the vehicle is fully depreciated.
The IRS will release the inflation-adjusted numbers for 2026 later this year.
The allowances listed above assume 100% business use. If business use is more than 50% but less than 100%, these numbers are proportionately reduced. If business use is less than 50%, the business-use percentage of the cost is depreciated over six tax years.
Depreciation and Elective Exemption from Business Interest Limit
Business taxpayers can face limits on federal income tax deductions for business interest expense. For tax years beginning in 2025, a business is exempt from the business interest expense deduction limitation rules if it had average annual gross receipts of $31 million or less, based on the three previous tax years. For tax years beginning in 2026, the average annual gross receipts threshold is $32 million.
However, a nonexempt farming business can elect to be exempt from the business interest expense limitation rules if it depreciates farming property with a normal depreciation period of 10 years or longer using the less-favorable alternative depreciation system (ADS) rules. ADS rules generally require using the straight-line method over a longer depreciation period than under the normal rules.
Likewise, a nonexempt real property business can elect to be exempt from the business interest expense limitation rules if it depreciates certain real property assets using the less-favorable ADS rules. Specifically, an electing real property business must use the ADS rules to calculate depreciation for nonresidential real property, residential rental property and nonresidential QIP.
More Generous, but More Complex
The first-year depreciation rules have become more generous—but also more complex—under the OBBBA. With multiple first-year write-off options, inflation-adjusted limits and special elections, the right strategy can vary widely based on your business structure, cash flow and future plans. Making the wrong choice can leave tax savings on the table or create other problems down the road. To ensure you're taking full advantage of the current rules while avoiding unexpected pitfalls, consult with your SSB tax advisor before filing your return or making major asset purchases.
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