The deadlines for filing 2025 tax returns (or extensions) are quickly approaching. While most tax planning strategies must be completed by December 31 of the tax year, some important decisions can still be made when filing your return. One of the most impactful choices is whether to take advantage of accelerated depreciation deductions, which can save you money now or in the future.
Depreciation Basics
When you purchase assets with a useful life of more than one year, the cost typically must be spread out and deducted over several years. This process is known as depreciation.
- The depreciation period varies depending on the type of asset, ranging from three years (software, small tools) to 39 years (commercial real estate).
- The Modified Accelerated Cost Recovery System (MACRS) allows larger deductions in the early years compared to the straight‑line method.
- Special tax breaks, enhanced by the One Big Beautiful Bill Act (OBBBA), can accelerate depreciation even further.
First-Year Bonus Depreciation
Under the OBBBA, taxpayers can claim 100% first‑year bonus depreciation on qualified assets acquired after January 19, 2025, and placed in service during 2025.
Eligible assets include:
- Equipment, computer hardware, and peripherals
- Transportation equipment (including certain passenger vehicles)
- Commercially available software
- Real estate qualified improvement property (QIP)
For assets acquired on or before January 19, 2025, and placed in service in 2025, the bonus depreciation rate is 40%.
Important note: Bonus depreciation is automatically applied unless you elect out, and elections must be made on an asset class basis.
Section 179 Expensing Election
Section 179 expensing allows small businesses to deduct the full cost of eligible assets immediately. For tax years beginning in 2025, the maximum deduction is $2.5 million.
Eligible assets include:
- Equipment, computer hardware, and peripherals
- Transportation equipment
- Commercially available software
- Real estate QIP
Additional eligible expenditures for nonresidential real property include:
- Roofs
- HVAC systems
- Fire protection and alarm systems
- Security systems
Section 179 also applies to personal property used for lodging, such as furniture and appliances in rental properties.
However, Section 179 has limits:
- The deduction phases out if more than $4 million of qualifying assets are placed in service.
- Deductions cannot create a business tax loss.
Depreciation Deduction Strategies
Maximizing depreciation deductions often provides the greatest immediate tax savings, improving cash flow and freeing up funds for reinvestment.
But in some cases, spreading deductions over several years may be more beneficial:
- Large first‑year deductions can reduce qualified business income (QBI) and lower the Section 199A deduction for pass‑through businesses.
- Deferring deductions may be advantageous if you expect higher tax rates in the future. Deductions are more valuable when rates are higher.
Conclusion
Choosing whether to maximize depreciation deductions requires careful consideration of your overall tax situation. We can help identify which breaks you qualify for, evaluate the impact on your 2025 return, and plan strategically for 2026 investments. Contact us today to get started.
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