If your business has capital equipment needs, keep a close eye on the federal budget reconciliation bill negotiations. If the bill gets passed this summer, there’s a strong chance the new law will reinstate 100% expensing for the 2025 tax year, which could provide a major financial incentive to make capital investments.
The 100% expensing provision — also known as “100% bonus depreciation” — is part of the House-approved bill that went to the Senate for consideration in late May. With the legislative process still underway, there is no guarantee, but most believe the provision will survive if the bill becomes law. The only real question is whether 100% expensing will be designated as permanent or put on a phaseout schedule.
The Investment Incentive
The bill proposes 100% expensing for investments in eligible short-lived business assets. This would allow companies to deduct the entire cost of these assets in the first year they are placed in service.
In the House-approved version of the bill, 100% expensing would provide an immediate financial benefit. Businesses would be able to claim this deduction for assets acquired and placed in service between Jan. 19, 2025, and Jan. 1, 2030.
Currently, the bonus depreciation rate is just 40% for assets placed in service in 2025. This rate has been phasing down from 100% since 2023, as stipulated in the Tax Cuts and Jobs Act (TCJA) of 2017.
Whether You Buy or Lease
If the bill passes and includes 100% expensing, businesses can take advantage of the tax benefit whether they purchase equipment outright or lease it.
The buy option might make the most sense if your business is tax efficient and can use all the depreciation in the quarter when the equipment was purchased. If that’s not the case, however, you might want to consider taking advantage of 100% expensing indirectly through leasing the equipment: The lessor reaps the tax savings from the 100% deduction and can pass it along to your business in the form of a lower implicit rate on your lease.
What Happens Next?
The Senate will make revisions to the bill and can approve it with just a simple majority. The legislation will then need to go back to the House and survive a second vote before it can be signed into law by the president.
The reconciliation bill has many controversial provisions unrelated to equipment finance, and passage isn’t a certainty. If the bill doesn’t become a law, or if it does but the new law does not include 100% expensing (an unlikely outcome), businesses would need to revert to the complex, longer-term depreciation schedule used prior to 2017 — the modified accelerated cost recovery system (MACRS).
How to Respond
But bottom line, as matters stand today, there’s a good chance that 100% expensing/bonus depreciation will be making a return in 2025. Financial managers should monitor budget bill news and know that if 100% expensing does return, it can provide an immediate tax benefit to support acquisition of a wide range of capital equipment — from transportation, farm, medical, materials handling and construction equipment to machine tools, office machines, computer hardware and software, and more.
So, how should you respond? If your business has capital equipment needs, start thinking about how you would finance any acquisitions. Then contact your Hancock Whitney banker or equipment finance consultant to discuss how you can best take advantage of the proposed new capital-investment tax benefit.
This information is educational and informational in nature, and not intended to be used as tax, legal or accounting advice. We advise you to consult your tax, legal and accounting advisors regarding your tax needs.
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