The One Big Beautiful Bill Act (OBBBA) restored and enhanced three key provisions for business taxpayers: 100% bonus depreciation, increased Section 179 limits and a taxpayer-friendly calculation of adjusted taxable income (ATI) for taxpayers subject to Sec. 163(j) interest expense limits. While bonus depreciation and Section 179 expense may now seem interchangeable, taxpayers must be aware of an important difference in how each provision impacts allowed interest expense under Sec. 163(j).
In 2018, the Tax Cuts and Jobs Act (TCJA) implemented a rule designed to limit the amount of deductible interest expense certain taxpayers can claim. The provision has taken various forms since then, but for 2024, the rule generally worked as follows for affected taxpayers (all descriptions are based on 2024 law):
Beginning in 2025, the OBBBA permanently changed the calculation of ATI to be on the basis of earnings before interest, taxes, depreciation and amortization (EBITDA). That means depreciation and amortization are now added back for the purpose of determining the amount of interest expense that may be deducted. For a taxpayer with significant depreciation and amortization deductions that had interest expense limited by Sec. 163(j), the addback can be very meaningful, as it now allows more interest to be deducted, thus reducing overall taxable income.
For example, assume Company A has book net income of $5,200,000, which includes $3,000,000 of interest expense and $1,800,000 of depreciation.
Under pre-OBBBA rules (EBIT basis):
Under OBBBA rules (EBITDA basis):
Sec. 179 allows immediate expensing of certain asset additions, which accelerates tax deductions. The OBBBA permanently increased the amount of Sec. 179 expense allowed to be claimed annually from roughly $1.16 million in 2024 to $2.5 million in 2025, with the fixed asset addition phaseout threshold increasing from roughly $2.9 million in 2024 to $4 million in 2025. Both 2025 amounts are indexed for inflation. Sec. 179 expense continues to be limited by positive business income.
While this provision is claimed in lieu of or in addition to depreciation, and is even claimed on the same IRS tax form, Sec. 179 expense is not actually considered depreciation.
Finally, and perhaps most significantly, the OBBBA made permanent 100% bonus depreciation. As a result, any asset previously eligible for bonus depreciation and installed pursuant to a written binding contract on or after January 20, 2025, is now eligible for full and immediate expensing. Bonus depreciation is not subject to limits around how much can be expensed annually; rather, if an asset is eligible for bonus depreciation, the bonus depreciation expense can fully reduce taxable income.
So how does all of this come together? When preparing tax returns and calculating taxable income, bonus depreciation and Sec. 179 expense can look equally attractive and appear to generate the same result. Once taxable income is calculated, taxpayers will calculate ATI to determine the amount of allowed interest expense and whether or not any interest expense reduction is necessary. Here is the tricky part: recall that ATI is based on a calculation of EBITDA, which is earnings before interest, federal income taxes, depreciation and amortization. Since Sec. 179 expense is not considered depreciation, it is not added back with other depreciation expenses. This causes ATI to be lower when Sec. 179 expense is claimed in lieu of bonus depreciation, thus decreasing the amount of allowed business interest expense.
From a planning perspective, the unequal treatment of Sec. 179 expense and 100% bonus depreciation in the context of ATI can create a significant negative result for affected taxpayers. For example, a taxpayer maximizing the Sec. 179 expense by electing a $2,500,000 expense also decreases the allowed interest expense for the year by 30% of the Sec. 179 expense, or $750,000. For a taxpayer in a high tax bracket, this can negatively, and significantly, impact the amount of taxes owed.
Taxpayers affected by interest expense limitations and considering Sec. 179 expense should take care to model scenarios early in the taxable income calculation process. Specific scenarios where Sec. 179 may be considered include when:
Costly errors can be easily avoided if a taxpayer understands the important distinctions between Sec. 179 and 100% bonus depreciation, and how they impact the calculation of allowed interest expense under Sec. 163(j). Always consult the latest regulations and consider seeking expert advice for complex transactions and calculations.
Contact Mike McGivney or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.