The One Big Beautiful Bill Act (OBBBA) delivers a major win for commercial real estate owners by permanently restoring 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
This change marks a clear reversal of the Tax Cuts and Jobs Act (TCJA), which had scheduled bonus depreciation to gradually phase out through 2027. Under the TCJA’s timeline, businesses would have been limited to deducting just 40% of eligible property costs placed in service in 2025 under the bonus depreciation rules.
By reinstating full expensing, the OBBBA allows businesses to immediately deduct the entire cost of qualifying property, provided the property is acquired after January 19, 2025. This accelerated deduction gives taxpayers the opportunity to realize the full tax benefit upfront, rather than spreading it over multiple years.
The OBBBA adds Internal Revenue Code (“IRC”) Section 168(n), which provides a new category of property — qualified production property (QPP); QPP is eligible for 100% bonus depreciation and is defined as nonresidential real property that:
The term “qualified production property shall not include that portion of anynonresidential real propertywhich is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.” It also will not include any property to which the alternative depreciation system applies.
Before the Tax Cuts and Jobs Act (TCJA) took effect in 2017, the IRS issued the final Tangible Property Regulations (TPRs), which became effective on January 1, 2014. Commonly referred to as the “repair regulations,” these rules significantly reshaped how businesses account for the costs of acquiring, improving, repairing and maintaining tangible property. The TPRs established a comprehensive framework for determining whether an expenditure must be capitalized and depreciated over time or can be deducted immediately as a repair expense.
When it comes to repair and maintenance costs, the key is to understand how the expense should be treated for tax purposes. Each cost must be analyzed to determine whether it qualifies as a repair or an improvement.
Ask a simple question first: does the work improve, restore or adapt the property? If the expense significantly improves the property, restores it to its original condition or adapts it for a new or different use, it is considered an improvement. In that case, the cost must be capitalized and depreciated over time rather than deducted immediately.
If the expense does not meet the criteria for a betterment, restoration or adaptation, it may be fully expensed in the current year, provided it falls within certain allowable thresholds. The IRS provides several safe harbor elections:
By applying these rules and elections correctly, taxpayers can ensure repair and maintenance costs are treated efficiently while remaining compliant with tax regulations.
With the phaseout of bonus depreciation, businesses may have relied on the repair regulations as a way to accelerate expenses and fill the gap for the bonus phaseout limitation. The TPR rules continue to be essential even with the restored bonus depreciation. While not all costs are eligible for bonus depreciation, combining multiple depreciation and expense strategies can significantly increase overall deductions.
QPP opens the door to new opportunities in both new construction and renovation projects by allowing the full cost of qualifying facilities to be deducted in the year they are placed in service. This accelerated cost recovery can significantly improve cash flow and enhance the overall financial impact of capital investments.
Partial Asset Disposition elections are another valuable but often overlooked tax planning tool. This election allows taxpayers to expense and write off the remaining undepreciated basis of a building component when it is replaced or retired. For example, when a roof is replaced, the remaining tax basis of the old roof may be immediately deducted rather than recovered through depreciation over many additional years, accelerating deductions.
Another important consideration is the potential impact of depreciation recapture upon sale of the property. When an asset is disposed of, taxpayers may be required to recapture prior depreciation deductions at a rate of 25%. By contrast, deductions taken under the TPR do not trigger depreciation recapture, as the costs are expensed immediately and no depreciable basis remains. Understanding this distinction is critical when evaluating the long-term tax implications of accelerated deductions.
State tax planning is another critical factor to consider, as many states do not conform to federal bonus depreciation rules. As a result, taxpayers may face differing depreciation treatments at the state level, making it essential to evaluate conformity rules to avoid unexpected tax exposure and to optimize overall tax outcomes. For example, expenses under the TPRs generally do not result in state addbacks.
Finally, the OBBBA permanently reinstated the EBITDA calculation in determining the deductibility of interest expense under IRC Section 163(j). In other words, depreciation and amortization are once again added back in determining the threshold for which interest is deducted. As such, and all other things being equal, treatment as an expense of depreciation versus repairs will have the added benefit of potentially deducting more interest. This change became effective January 1, 2025.
While the repair regulations can be complex and require careful evaluation to apply correctly, they also offer a powerful planning opportunity for real estate and business owners. When evaluated alongside other depreciation and expensing strategies, they can provide meaningful tax benefits both in the short and long term.
Stephen Bertonaschi, a senior managing director, is Leader of Real Estate Tax Compliance group within the Real Estate Solutions practice at FTI Consulting, Inc. Contact him at stephen.bertonaschi@fticonsulting.com. Laurie Gawel is a senior director in business tax services at FTI Consulting.
