How Commercial Property Owners Can Use Bonus Depreciation to Reduce Tax Liability
As a commercial property owner, you have the opportunity to significantly reduce your tax liability and improve your cash flow through bonus depreciation. This tax incentive allows you to deduct the full cost of qualified improvements in the year they are made. With the One Big Beautiful Bill Act (OBBBA) enacted on July 4, 2025, you can permanently enjoy 100% bonus depreciation for properties placed in service after January 19, 2025. This guide will help you understand how to take advantage of these changes.
Understanding Bonus Depreciation
Bonus depreciation, under Section 168(k) of the Internal Revenue Code, allows businesses to deduct the entire cost of qualified property upfront rather than over time. This was initially introduced to encourage investment and is particularly useful for commercial real estate owners making upgrades to their properties.
Key Changes with OBBBA
- 100% Bonus Depreciation: Restored permanently for eligible properties placed in service after January 19, 2025.
- Flexibility: Option to elect 40% bonus depreciation for the first tax year ending after January 19, 2025.
Eligible Property
Bonus depreciation applies to assets with a recovery period of 20 years or less. Here's what qualifies:
- Tangible Personal Property: Includes machinery, equipment, computers, vehicles, and furniture with 5-7 year periods. New and used items qualify if it's the owner's first use and not bought from a related party.
- Example: Installing new fixtures in a building.
- Qualified Improvement Property (QIP): Interior upgrades to nonresidential buildings, such as HVAC systems, plumbing, and lighting, with a 15-year period.
- Example: Renovating office lighting.
- Land Improvements: Includes parking lots, fences, and landscaping with a 15-year period.
- Example: Paving a new parking lot.
Exclusions: Whole buildings, utility property, or assets from related parties are not eligible.
Benefits for Commercial Owners
- Major Tax Reduction: Deduct 100% of the cost upfront. For instance, a $100,000 HVAC upgrade means a $100,000 deduction, significantly reducing taxes.
- Improved Cash Flow: Immediate deductions free up funds for further investments.
- Flexibility with New and Used Property: Expands access to upgrades.
- Combined Strategies: Pair with cost segregation to enhance deductions or use Section 179 expensing, with increased limits under OBBBA.
Practical Example
Consider a $200,000 upgrade in 2025: $100,000 for HVAC and $100,000 for lighting, placed in service after January 19.
- Bonus Depreciation: Results in a $200,000 deduction.
- Tax Savings (37% rate): $74,000 in 2025.
Without this bonus, savings would spread over 15 years, underscoring the benefit of full expensing.
Strategies to Maximize Savings
- Timing: Ensure assets are in service after January 19, 2025, to benefit from 100% bonus depreciation.
- Cost Segregation: Reclassify costs to boost bonus-eligible portions.
- Section 179 Complement: Use alongside bonus depreciation for additional savings.
- State Considerations: Federal rules may differ from state tax regulations.
- Documentation: Keep detailed records for IRS audits.
- Long-Term Planning: Consider the impact on future tax liability and potential for 1031 exchanges.
OBBBA Updates and Outlook
The OBBBA not only reinstates 100% bonus depreciation but also expands deductions like Section 179. This comprehensive relief allows commercial owners to optimize their tax strategies. Consulting a tax professional is advisable to navigate these changes effectively.
Conclusion
The One Big Beautiful Bill Act offers commercial property owners a powerful tool to enhance their financial strategies through permanent 100% bonus depreciation. By understanding these provisions and timing your investments wisely, you can significantly reduce your tax burden and improve cash flow.