Bonus depreciation in 2025 allows manufacturers to deduct 40% of the cost of qualifying assets in the first year they are placed in service. This tax incentive helps businesses reduce taxable income and improve cash flow, making it easier to fund equipment upgrades and facility expansions. However, the bonus depreciation rate has been decreasing annually and will phase out entirely by 2027 unless new legislation is introduced.
Key Points:
- 2025 Bonus Depreciation Rate: 40% for qualifying assets.
- Qualifying Assets: Tangible personal property with a recovery period of 20 years or less (e.g., CNC machines, robotic systems, HVAC for manufacturing).
- Deadlines: Assets must be acquired and operational by December 31, 2025.
- Future Changes: Bonus depreciation drops to 20% in 2026 and phases out in 2027.
- Exclusions: Land, buildings, long-lived assets, inventory, and intangible property do not qualify.
Manufacturers should plan purchases carefully to maximize tax benefits. For example, combining bonus depreciation with Section 179 deductions or conducting a cost segregation study can further optimize savings. Proper documentation and compliance with IRS rules are critical to avoid errors and penalties. Partnering with tax professionals can simplify the process and ensure all opportunities are utilized effectively.
Which Manufacturing Assets Qualify
Knowing which assets qualify for bonus depreciation is key to maximizing your tax benefits. The IRS has clear guidelines on eligible property, but the details can be more complex than they first appear.
Qualifying Manufacturing Property
Bonus depreciation applies to tangible personal property with a recovery period of 20 years or less. For manufacturers, this includes a broad range of equipment and improvements directly tied to production.
Some examples are production machinery like CNC machines, injection molding equipment, conveyor systems, robotic assembly lines, and packaging machinery. Supporting systems such as industrial generators, air compressors, forklifts, cranes, and quality control equipment also meet the criteria. Even HVAC systems designed for manufacturing purposes, like clean room air filtration or temperature-controlled storage, can qualify.
Qualified improvement property refers to specific upgrades made to the interiors of existing manufacturing buildings. Examples include installing heavy-duty flooring for machinery, specialized lighting for production areas, or reconfiguring layouts to accommodate new equipment. However, these improvements must be strictly interior and cannot involve structural components like the roof or building framework.
Technology used in production is another qualifying category. For instance, computer systems managing production or quality assurance are eligible, but general office computers or standalone software do not meet the requirements.
Important Dates and Deadlines
Timing plays a critical role in qualifying for bonus depreciation. Assets must be acquired and placed in service during the 2025 tax year to benefit from the 40% bonus depreciation rate. Simply purchasing the equipment isn’t enough – it must be fully installed, tested, and ready for use by December 31, 2025.
The “placed-in-service” date refers to when the asset is operational and ready for its intended purpose. For example, if a manufacturing line is delivered in November 2025 but requires two months of installation and testing, it wouldn’t qualify for 2025 if it’s not operational until February 2026.
Custom equipment often involves long lead times, so delays in delivery or installation can shift the placed-in-service date into the next tax year. Planning for potential delays is crucial to ensure the asset qualifies within the intended timeframe.
For used equipment purchases, the timing rules are the same, but there’s an extra condition: the equipment must be new to your business. You can’t claim bonus depreciation on equipment you previously owned, even if you sold it and repurchased it.
Proper planning and categorization of assets are essential for maximizing tax benefits under these rules.
Assets That Don’t Qualify
While it’s important to identify eligible assets, it’s equally critical to recognize those that don’t qualify for bonus depreciation.
Real property, such as land, manufacturing buildings, warehouses, and office facilities, follows standard depreciation schedules – typically over 39 years for commercial property. Building improvements like roofing, structural changes, or exterior renovations are also excluded.
Long-lived assets with recovery periods exceeding 20 years are not eligible. This includes infrastructure like permanent cranes integrated into buildings, specialized facilities, and utility systems considered part of the building.
Inventory and supplies are another category that doesn’t qualify. This includes raw materials, work-in-process inventory, finished goods, and consumable items like cutting tools, lubricants, or safety gear, which must be expensed as they are used.
Vehicles for standard transportation generally don’t qualify, though specialized equipment used directly on the production floor might.
Finally, intangible property like patents, trademarks, or goodwill is excluded. While these assets may be vital to your operations, they follow separate depreciation rules.
Understanding these distinctions upfront allows manufacturers to make better purchasing decisions, align timelines, and maximize their tax benefits while staying compliant.
How to Claim Bonus Depreciation
To claim bonus depreciation on your 2025 manufacturing assets, you’ll need to file IRS Form 4562. This form is used to report depreciation elections and calculations for the applicable tax year.
Make sure to carefully fill out the relevant sections of Form 4562 to include all eligible deductions. If you’re unsure about the process or need guidance, reaching out to a tax professional can make a big difference. For example, Weston Tax Associates specializes in helping manufacturing businesses navigate IRS requirements and maximize their deductions.
Once you’ve completed this step, consider exploring tax planning strategies to make the most of your benefits.
Tax Planning Tips for Manufacturers
Smart tax planning, especially around bonus depreciation, can help manufacturers lower their tax bills and free up funds for business growth. Timing and coordinating your deductions are key strategies to consider.
Time Equipment Purchases for Maximum Tax Benefits
The timing of your equipment purchases in 2025 plays a big role in your tax savings. For property acquired and placed in service after January 19, 2025, you can claim 100% bonus depreciation. However, assets placed in service during 2025 but acquired on or before January 19 only qualify for 40% bonus depreciation.
For construction projects, the acquisition date is determined by the binding contract. Qualified Production Property allows for 100% expense deductions on non-residential real property directly tied to manufacturing, as long as construction begins after January 19, 2025, and the asset is placed in service before January 1, 2031.
Manufacturers can also benefit from the increased Section 179 expensing limits. Starting with tax years after December 31, 2024, you can deduct up to $2.5 million, with a phase-out threshold of $4 million. Use Section 179 first to its $2.5 million limit, and then apply bonus depreciation for any additional eligible assets.
Additionally, reclassifying building components can help you accelerate depreciation and maximize savings.
Cost Segregation Study Benefits
A cost segregation study can help you identify parts of your building that qualify for shorter depreciation periods, unlocking extra deductions. Instead of depreciating an entire facility over 39 years, components can often be reclassified into 5-, 7-, or 15-year depreciation categories. Typically, 20% to 40% of a building’s components fall into faster depreciation categories.
For instance, in one case study, 61% of a newly purchased building’s assets were reclassified, and with bonus depreciation, 80% of those reclassified assets were written off in the first year. For a $5 million building, this strategy led to nearly $2.4 million in first-year depreciation. The financial impact is clear: reallocating $1 million from 39-year property to 5-year property can bring a net present value of around $200,000 and improve cash flow by $330,000 over five years.
Manufacturing facilities often have components eligible for accelerated depreciation, such as conveyor belts, service bay doors, robotic machinery, and trash enclosures. A study can also highlight Qualified Improvement Property and land improvements that qualify for faster depreciation. If you’ve purchased, built, expanded, or remodeled a building in the last 15 years and spent over $750,000, a cost segregation study could be worth exploring. Ideally, these studies should be conducted during the year of construction or purchase, but “look-back” studies can also be done later without amending past returns.
If your taxable income is expected to be low in certain years, deferring bonus depreciation might also be a strategic move.
When to Skip Bonus Depreciation
Sometimes, opting out of bonus depreciation makes sense. This can allow you to save deductions for future years when your business is more profitable. For instance, if your business has fluctuating profits or you’re managing net operating losses, the 40% depreciation rate for assets placed in service during 2025 might better align with higher-income periods.
State tax rules also play a role. Some states align more closely with Section 179 expensing than with bonus depreciation, so understanding your state’s approach is important. Additionally, recent changes to business interest deductibility – now capped at 30% of EBITDA instead of EBIT – might make financing equipment purchases more appealing while preserving depreciation deductions for future years.
Consulting with experienced tax professionals, like the team at Weston Tax Associates, can help you evaluate different scenarios. They can review your projected income and investment plans to craft a strategy that aligns with your long-term financial goals.
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Common Mistakes and Compliance Requirements
Claiming bonus depreciation incorrectly can result in hefty tax penalties and increase the risk of audits. To safeguard your tax savings and stay aligned with tax regulations, it’s critical to understand common mistakes and adhere to compliance requirements. These steps build on earlier guidance to help you maximize benefits while maintaining compliance.
Avoid Asset Classification Errors
One of the most frequent mistakes when claiming bonus depreciation is misclassifying assets. The IRS has strict guidelines outlining what qualifies as eligible property, so it’s essential to verify that your assets meet these criteria. For instance, manufacturing equipment must be new to your business. Simply relocating machinery within your operations typically doesn’t affect its eligibility.
Mixed-use assets can complicate matters further. If equipment serves both qualifying (e.g., manufacturing) and non-qualifying purposes, only the portion used for qualifying activities is eligible for bonus depreciation. Be sure to allocate usage accurately and include detailed descriptions of each asset, such as its make, model, serial number, and specific function. Avoid vague terms like “machinery” or “equipment.”
The placed-in-service date is another critical factor, as it determines how depreciation is calculated. Errors often occur with building components. Manufacturing facilities may include specialized systems – like electrical setups, ventilation, or process-specific installations – that might qualify for accelerated depreciation instead of following the standard building depreciation schedule.
Maintain Proper Documentation
The IRS requires thorough documentation to support bonus depreciation claims. Incomplete or missing records could jeopardize your deductions, even if they’re legitimate. Keep detailed records that confirm an asset’s eligibility, cost basis, and placed-in-service date.
Essential documentation includes purchase records like invoices, agreements, and payment receipts. For financed equipment, retain loan documents. Adjustments, such as trade-in allowances or manufacturer rebates, should also be accounted for in your records.
Additionally, installation records, commissioning reports, and production logs can help establish when an asset became available for its intended use. For complex systems, document the placed-in-service date for each major component, especially if different parts require separate depreciation treatments.
If you’ve conducted a cost segregation study to reclassify building components, maintain all supporting documents, such as engineering reports, architectural plans, and professional analyses. Be aware that state tax rules may differ from federal ones, so you may need separate calculations and documentation for state compliance.
Stay Updated on Tax Law Changes
Tax laws are constantly evolving, and staying informed is crucial to avoiding compliance errors. The IRS frequently issues updates – such as revenue rulings and technical memoranda – that clarify bonus depreciation rules.
State regulations can also vary. If your business operates in multiple states, it’s important to track each jurisdiction’s specific requirements and deadlines. Staying informed about these differences ensures your filings remain accurate and compliant.
Working with tax professionals can make this process more manageable. For example, firms like Weston Tax Associates monitor changes in tax laws and assist manufacturers in navigating complex depreciation rules. They help ensure that your bonus depreciation claims meet both federal and state requirements.
Regular compliance reviews should also be a part of your annual tax planning. These reviews can help you spot potential issues with asset classifications, documentation, or depreciation calculations before they lead to audit risks. By integrating these practices into your strategy, you can protect your tax benefits and stay on top of compliance requirements.
Conclusion
Bonus depreciation stands out as a powerful tax tool for manufacturing businesses in 2025. It allows companies to take an immediate deduction on qualifying assets as soon as they’re put into use, reducing current tax obligations and freeing up cash flow for critical operations and expansion. This provision provides immediate financial relief by speeding up deductions, but to make the most of it, manufacturers need to identify eligible assets and time their purchases wisely. With the 2025 tax law changes in mind, strategic investment planning becomes even more critical. However, the rules surrounding bonus depreciation can be tricky – errors in asset classification or incomplete documentation can lead to penalties or trigger audits.
To maximize savings, manufacturers can pair bonus depreciation with strategies like timing equipment purchases and conducting cost segregation studies. It’s important to note that bonus depreciation isn’t always the ideal choice for every scenario. In some cases, spreading out depreciation over several years may offer better long-term tax advantages.
Because tax regulations are complex and constantly evolving, partnering with seasoned tax professionals is essential. Firms like Weston Tax Associates specialize in guiding manufacturing businesses through the nuances of depreciation laws while ensuring compliance with both federal and state requirements. Their expertise in tax planning can help manufacturers optimize their tax strategy and avoid costly mistakes.
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FAQs
How can manufacturers maximize tax savings with bonus depreciation in 2025?
Manufacturers have a prime opportunity to boost tax savings in 2025 by utilizing 100% bonus depreciation for qualifying assets placed in service after January 1, 2025. This provision allows businesses to deduct the entire cost of eligible property immediately, which can lower taxable income and improve cash flow.
To make the most of this benefit, manufacturers should:
- Act quickly to acquire and use assets: Ensure any purchases meet eligibility criteria and are operational within the required timeframe.
- Plan purchases wisely: Timing and proper classification of assets can maximize deductions and align with broader business objectives.
For tailored advice, consulting with a tax professional is key. Weston Tax Associates offers expertise in helping businesses navigate IRS regulations and minimize tax liabilities effectively.
How will the phase-out of bonus depreciation by 2027 affect manufacturing businesses’ tax planning?
The gradual reduction of bonus depreciation – from 40% in 2025 to 0% by 2027 – will significantly affect tax planning for U.S. manufacturing businesses. To maximize the remaining benefits, companies should consider accelerating purchases of eligible assets in 2025 and 2026 before these advantages disappear.
As this shift unfolds, businesses may need to explore other tax strategies, such as adopting alternative depreciation methods or identifying new incentives. Taking a proactive approach will be key to managing tax savings effectively and ensuring financial stability during this transition.
What’s the difference between bonus depreciation and Section 179, and how can businesses use them together?
When it comes to cutting down taxable income, bonus depreciation and Section 179 are two key strategies businesses can use, though they function differently. With bonus depreciation, companies can deduct a percentage of an asset’s cost – currently up to 100% – right away, even if this deduction results in a net operating loss. In contrast, Section 179 allows businesses to deduct a specific dollar amount upfront, but only up to their taxable income. Unlike bonus depreciation, Section 179 can’t be used to create a loss.
Many businesses combine these tools to get the best tax advantage. Typically, they start with Section 179 to claim deductions up to the taxable income limit, then use bonus depreciation for any leftover costs. This approach can help improve cash flow and lower tax obligations. Be sure to work with a tax professional to navigate these options and ensure everything is done correctly.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
