What Changed: A Fast Overview for Contractors
The One Big Beautiful Bill Act (OBBBA), enacted earlier in 2025, restored 100 percent bonus depreciation for qualifying property placed in service on or after January 19, 2025. This key provision reverses the phasedown that had reduced bonus depreciation to 40 percent earlier in the year. For contractors, this means new and used equipment, such as excavators, bulldozers, or fleet trucks, may now be fully expensed in the year they are put into service rather than depreciated over several years.
At the same time, Section 179 expensing remains available, providing additional flexibility for small to mid-sized construction firms. For 2025, the Section 179 deduction limit rises to $1.25 million, with a phase-out threshold of $2.5 million in total asset purchases.
Together, these provisions create a strong year-end buying window for contractors looking to invest in equipment, manage taxable income, and improve cash flow.
Bonus Depreciation: Who Qualifies and Why “Placed in Service” Matters
Eligible Property for Contractors
Bonus depreciation applies to a wide range of tangible property with a recovery period of 20 years or less, including:
- Construction machinery and heavy equipment
- Trucks, vans, and certain fleet vehicles
- Tools, office computers, and construction software
- Certain qualified improvement property (QIP) to nonresidential buildings
Both new and used assets qualify, provided they were not previously owned by the taxpayer and were acquired through an arm’s-length transaction.
The Key Date: “Placed in Service”
To qualify for the restored 100 percent deduction, property must be placed in service on or after January 19, 2025. This means the equipment must be delivered, installed, and ready for use on or before December 31, 2025.
For contractors, timing is critical: if a new backhoe or truck chassis is delivered in December but not fully operational until January, it could affect whether the deduction falls under the 2025 or 2026 rules.
Real-World Implications
Large contractors often experience supply-chain or delivery delays, so scheduling installation and acceptance testing should be part of year-end planning. Work with vendors to obtain written confirmation of delivery and in-service dates; this documentation is essential if the IRS reviews your deduction.
Section 179 Expensing for 2025: How It Complements Bonus Depreciation
While bonus depreciation offers 100 percent expensing for most qualifying assets, Section 179 allows businesses to choose which assets to expense immediately and which to depreciate over time.
For 2025, the key Section 179 limits are:
- Deduction limit: $1.25 million
- Phase-out threshold: $2.5 million
- Applies to: Equipment, vehicles, off-the-shelf software, and certain improvements
Unlike bonus depreciation, Section 179 is limited to taxable income. You cannot use it to create or increase a loss. However, you can carry forward unused Section 179 deductions to future years.
Strategic Use Cases
- Small contractors: May use Section 179 to expense individual assets while keeping taxable income near zero.
- Mid-sized firms: Can pair Section 179 with bonus depreciation—using 179 for assets subject to business-use limits and bonus for the remainder.
- Fleet purchases: Section 179 offers flexibility when dealing with “luxury auto” limits or mixed-use vehicles.
Federal vs. State: The Kentucky Decoupling Trap
Contractors operating in Kentucky or other nonconforming states must remember that state depreciation rules often differ from federal law.
Kentucky, for example, does not conform to federal bonus depreciation and caps Section 179 expensing at a much lower threshold. This means firms taking 100 percent bonus depreciation federally may have to add back depreciation on their state return, creating a temporary difference and higher state taxable income.
Baldwin’s Recommendation
Maintain separate fixed-asset ledgers for federal and state purposes. This dual tracking ensures accurate reporting and prevents surprises at tax time. Baldwin CPAs can also help identify state-specific elections to minimize addbacks and smooth cash flow.
The 2025 Year-End Playbook: Actions Before December 31
- Plan and Purchase Early
Given production backlogs and equipment delivery times, contractors should secure purchase orders and financing well before year-end. Ensure vendors provide documentation showing when assets were delivered and placed in service.
- Review Capitalization Policies
Confirm your capitalization thresholds align with your tax strategy. Smaller items, such as laptops or power tools, might qualify for de minimis expensing under Section 1.263(a)-1(f) of the tax code.
- Coordinate with Your CPA on Elections
Bonus depreciation is automatic unless you elect out. Section 179 requires a specific election on Form 4562. Coordinate your elections carefully to balance taxable income, bonding capacity, and lender requirements.
- Project Cash Flow and Debt Ratios
Accelerated deductions reduce book income and may affect EBITDA-based covenants or Section 163(j) interest limitations. Baldwin CPAs can help model these effects before closing year-end books.
Looking Ahead to 2026: Stay Strategic
While OBBBA made 100 percent bonus depreciation permanent for property placed in service after January 19, 2025, contractors should still plan for long lead times on large equipment and vehicles.
Key Strategies for 2026
- Order early: Secure delivery slots aligned with your fiscal calendar.
- Negotiate delivery clauses: Tie “placed in service” dates to project schedules and tax planning windows.
- Monitor IRS guidance: The agency may issue clarifications on effective dates and special property rules in 2026.
Special Situations Contractors Should Know
Used Equipment Purchases
Used equipment qualifies for 100 percent bonus depreciation if it meets the acquisition and ownership criteria. This is a major advantage for contractors purchasing refurbished or fleet vehicles.
Qualified Improvement Property (QIP)
Interior improvements to nonresidential buildings can be fully expensed under the new law. This is especially useful for contractors updating office or warehouse space.
Vehicle Limitations
Certain light-duty vehicles remain subject to luxury auto limits under Section 280F. However, heavy SUVs and trucks with a gross vehicle weight rating (GVWR) over 6,000 pounds may qualify for full expensing.
How Baldwin CPAs Helps Contractors Execute
Scenario Modeling
Baldwin CPAs helps contractors evaluate the optimal mix of bonus and Section 179 deductions by asset category, project timing, and financing method.
Documentation Support
Our team ensures you have audit-ready evidence: invoices, delivery receipts, placed-in-service certifications, and ledger entries that support deductions under both federal and state rules.
Ongoing Monitoring
We track IRS updates, state conformity changes, and financial-statement implications, so your depreciation strategy remains both compliant and advantageous.
Key Takeaway for Contractors:
With full bonus depreciation back in play and Section 179 limits rising, 2025 offers a powerful window to refresh your equipment fleet, reduce taxable income, and strengthen cash flow. Timing is everything: plan early, document thoroughly, and coordinate with your Baldwin CPAs before December 31. Reach out today.
FAQs
Q: Does 100 percent bonus depreciation apply to used equipment?
Yes. Used machinery and vehicles qualify if you did not previously own them and they were acquired in a standard purchase (not from a related party).
Q: What does “placed in service” mean for construction assets?
It means the asset is ready and available for its intended use—installed, tested, and in working condition by December 31, 2025.
Q: How do Section 179 and bonus depreciation differ?
Section 179 has annual dollar limits and cannot create a loss. Bonus depreciation has no such cap and can drive a net operating loss (NOL).
Q: How does Kentucky treat bonus depreciation?
Kentucky does not conform to federal bonus depreciation. Firms must adjust for addbacks on their state returns.
Q: Can 100 percent bonus depreciation create cash-flow issues with lenders?
Yes, since the deduction reduces book income and could affect loan covenants tied to EBITDA. Contractors should model these impacts with their CPA.
