Changes Under the One Big Beautiful Bill Act
The tax landscape for real estate changed significantly with the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025. For property owners in the Bath and Bethlehem areas, these changes have made the timing and classification of building assets more critical than ever before.
Understanding how the new federal laws interact with Pennsylvania’s specific tax code is essential for maintaining accurate financial records and optimizing long-term cash flow.
The Return to 100% Bonus Depreciation
Under previous legislation, bonus depreciation was on a “sunset” schedule, dropping by 20% each year. However, IRS Notice 2026-11 confirmed that the OBBBA has permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.
This means that instead of depreciating assets like specialized electrical systems, flooring, or land improvements over decades, businesses can now deduct the entire cost in the first year. This “full expensing” model is designed to incentivize domestic investment and immediate reinvestment into property improvements.
Defining Bonus Depreciation
Bonus depreciation is a federal tax incentive that allows a business to immediately deduct 100% of the purchase price of eligible assets in the first year they are placed in service. Rather than recovering the cost of equipment or building improvements slowly over several years, this provision accelerates the deduction to provide an immediate reduction in tax liability and a significant boost to current cash flow.
How Bonus Depreciation Compares to Section 179
While both are “expensing” tools used to accelerate tax benefits, they serve different strategic purposes under the One Big Beautiful Bill Act (OBBBA) of 2025.
|
Feature |
Bonus Depreciation 168(k) |
Section 179 Expensing |
|
2026 Limit |
No dollar limit |
$2,560,000 maximum deduction |
|
Phase-out |
None |
Begins after $4,090,000 in purchases |
|
Net Income |
Can create a tax loss (NOL) |
Cannot exceed business taxable income |
|
PA State Rules |
Often “decoupled” (not allowed in PA) |
Generally followed (up to state limits) |
Strategic Interaction in 2026
Under current IRS rules, there is a specific “order of operations” for these deductions. A business typically applies Section 179 first to its eligible equipment, and then applies 100% bonus depreciation to any remaining balance.
For a Lehigh Valley business, the choice between the two often comes down to state compliance. Because Pennsylvania frequently requires taxpayers to “add back” federal bonus depreciation for state tax purposes (PA Department of Revenue, PIT Guide), using Section 179 where possible may result in a more consistent deduction across both your federal and state tax returns.
Identifying Qualified Property
Not every building component qualifies for the accelerated 100% rate. The IRS maintains strict definitions for what can be “segregated” from the general 39-year building structure:
- Personal Property (5 & 7-year life): This includes non-structural items such as dedicated plumbing for equipment, decorative lighting, and removable wall coverings
- Land Improvements (15-year life): This category covers external assets like parking lots, sidewalks, and fencing (IRS Publication 527).
- Permanent Structure (39-year life): Permanent features of the building like its fundamental structure.
- Qualified Production Property (QPP): A new category introduced by the OBBBA under Section 168(n). If a facility is used for manufacturing, production, or refining of tangible products, the building structure itself (normally depreciated over 39 years) may qualify for immediate 100% expensing. To be eligible, the property must be new construction with the original use commencing with the taxpayer, construction must have begun after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031. Offices, administrative spaces, parking, sales areas, and research facilities within the building do not qualify.
The Pennsylvania “Decoupling” Challenge
It is important for local investors to note that Pennsylvania does not always follow federal leads on depreciation. Specifically, Act 45 of 2025 ensures that Pennsylvania’s Corporate Net Income Tax remains “decoupled” from these federal bonus provisions for C-Corps (PA Department of Revenue, Act 45 Guidance).
While you may claim a 100% deduction on your federal return, Pennsylvania requires an “add-back” of that deduction for C-Corporations, which is then recovered through standard depreciation over several years. Navigating this discrepancy requires a “dual-track” accounting approach to ensure compliance at both levels of government.
At Vreeland accounting we can make sorting out your optimal tax preparation easy. We take it on so you don’t have to deal with the difficult leg work.
The Value of a Technical Record
The IRS Cost Segregation Audit Techniques Guide emphasizes that the quality of documentation determines the validity of a depreciation claim. A study provides a contemporaneous record. This is a technical snapshot of the property at the time of purchase or renovation.
For Lehigh Valley investors, this documentation serves as a defensive shield during audits and a clear roadmap for future “partial asset dispositions.” This allows you to claim a loss when a specific component (like an electrical system) is replaced in the future.
Key Takeaways for 2026:
- Restored Incentives: 100% bonus depreciation is back for assets acquired after Jan. 19, 2025.
- State Differences: Pennsylvania state tax law differs from federal rules for corporate owners.
- Documentation is Critical: IRS scrutiny has increased for “rule-of-thumb” estimates; detailed reports are the regulatory standard.
Vreeland Accounting provides technical analysis for real estate investors throughout the Lehigh Valley. If you are evaluating a recent acquisition or renovation, a strategy session can help determine the most compliant path forward for your portfolio.
