Management Advisory Services & Business Consulting Archives

Should your business consider a fiscal year end?

Management Advisory Services & Business Consulting|May 7, 2026

Most businesses close their books for tax and accounting purposes on December 31 because it aligns with the calendar year. But a calendar year isn’t always the best option. For some companies, choosing a fiscal year end that better reflects their business cycle can improve financial reporting and simplify year-end procedures and tax filing. Here’s what you should know when deciding on the right tax year end for your business.

Fiscal-year basics

A fiscal year is a 12-month accounting period that doesn’t end on December 31. For example, a company might operate on a fiscal year running from July 1 through June 30.

Some businesses use a 52- or 53-week fiscal year. These periods don’t necessarily end on the last day of a month. Instead, they may close on the same weekday each year, such as the last Friday in March. This approach is common in industries where weekly activity cycles are more meaningful than monthly reporting.

Using a fiscal year also changes tax filing deadlines. Pass-through entities — including partnerships, limited liability companies and S corporations — generally must file their tax returns by the 15th day of the third month after their fiscal year ends. For example, a business with a June 30 fiscal year end would file its return by September 15. Fiscal-year C corporations generally must file by the 15th day of the fourth month following the fiscal year close. (These correspond to the calendar-year deadlines of March 15 for pass-throughs, which is the 15th day of the third month after December 31, and April 15 for C corporations, which is the 15th day of the fourth month after December 31.)

When a fiscal year makes sense

Not every business can choose its own tax year. Sole proprietorships typically must use a calendar year because the business isn’t legally separate from its owner, who files an individual tax return based on the calendar year.

Other businesses may be able to adopt a fiscal year if they can demonstrate a valid business purpose or qualify for certain IRS elections. In practice, this usually means aligning the tax year with the company’s operating cycle. For seasonal businesses, a fiscal year can provide a clearer view of performance. Construction companies, farms, accounting firms and retailers often experience significant fluctuations throughout the year.

Consider a snowplowing company that earns most of its revenue between November and March. A December 31 year end divides one winter season into two tax years, making it harder to evaluate profitability for that period. A fiscal year ending after the winter season may present financial results more accurately than a calendar year would.

Businesses that restructure or significantly change their operations may also consider changing their tax year. Doing so generally requires IRS approval by filing Form 1128, “Application to Adopt, Change or Retain a Tax Year.” Companies that change their tax year usually must also file a return for the short period created during the transition.

Beyond taxes

The benefits of adopting a fiscal year aren’t limited to tax reporting. Choosing the right year end can also make financial reporting and planning easier.

If a company’s busiest months fall late in the calendar year, closing the books on December 31 can disrupt operations and strain accounting staff during an already demanding period. Moving the year end to a slower time can make it easier to perform inventory counts, review contracts and complete financial statements. This can be especially helpful for businesses that rely on detailed job costing or inventory management. Completing year-end accounting tasks when operations are less hectic can reduce errors and improve the financial data that business owners and stakeholders rely on for decision-making.

We can help

Selecting a fiscal year end involves more than choosing a convenient date. The right year end can streamline reporting, provide more meaningful insights and support better planning. If you’re thinking about a change, contact us. We’ll help you determine the best fit for your operations and guide you through the IRS approval process.

Options for forfeited employee FSA balances

Management Advisory Services & Business Consulting|April 30, 2026

Many businesses offer health care and dependent care flexible spending accounts (FSAs) as part of their employee benefits package. These plans provide valuable tax savings to employees and payroll tax savings to employers.

If your company operates a calendar-year FSA with a 2½-month grace period, employees have until March 15 to incur eligible expenses for their 2025 plan balances. After that, any unused 2025 funds may be forfeited under the “use-it-or-lose-it” rule. Here’s a refresher on how FSAs work and what employers can do with forfeited balances.

The basics

Under an employer-sponsored FSA plan, employees may be able to contribute a portion of their pay to a:

Health care FSA. These accounts may be used for qualifying out-of-pocket medical, dental and vision expenses for the employee and his or her spouse and/or qualified dependents. For 2026, the maximum employee contribution to a health care FSA increases to $3,400 (from $3,300 in 2025). (The limit is annually indexed for inflation.)

Dependent care FSA. These accounts may be used for qualifying child care or adult dependent care expenses. For 2026, under 2025 tax legislation, the dependent care FSA contribution limit increases to $7,500 per household ($3,750 for married couples filing separately). The limit for 2025 was $5,000 ($2,500 for separate filers). (The limit isn’t inflation-indexed, so it won’t go up in the future unless another increase is passed by Congress and signed into law.)

Employee contributions are made on a pretax basis, reducing federal income tax, Social Security tax and Medicare tax (and often state income tax). The FSA plan directly pays or reimburses employees for qualified expenses, and the payments or reimbursements are tax-free.

Use-it-or-lose-it rule

If employees don’t use their full FSA balances by the end of the plan year, leftover balances generally revert to the employer under the use-it-or-lose-it rule. However, there are two exceptions:

An FSA plan can allow a grace period of up to 2½ months. Most FSA plans operate on a calendar-year basis. For a calendar-year FSA plan, the grace period gives employees until March 15 of the following year to incur qualified expenses to drain their unused FSA balances from the previous year.
A health care FSA plan can allow employees to carry over up to an annually inflation-indexed amount of unused balances from one year to the next. The amount that can be carried over from 2026 to 2027 is $680 (up from the $660 that could be carried over from 2025 to 2026).

It’s important to note that a health care FSA plan can offer either the carryover or the grace period, but not both. Dependent care FSA plans can offer only the grace period, not the carryover.

Options for forfeited FSA funds

After any applicable grace period ends, or after applying any permitted health care FSA carryover, employers may retain forfeited balances under IRS cafeteria plan rules. Many businesses use the funds to offset plan administrative expenses.

Other permitted uses generally include, on a reasonable and uniform basis: 1) reducing the amount employees need to contribute in a future year to reach a certain FSA balance (for example, employees need to contribute only $950 to have a $1,000 FSA balance, with the extra $50 funded by forfeited balances from a previous year), or 2) returning amounts to participants (typically treated as taxable wages and subject to payroll taxes and income tax withholding).

Forfeitures can’t be returned to plan participants based on individual claims experience. Any allocation of returned funds must be nondiscriminatory and consistent with plan terms.

Natural check-in point

Around the grace-period deadline is a natural time for business owners to review how their FSA plans handle unused balances. It’s also a good opportunity to confirm that your current plan design, including grace period or carryover provisions, aligns with your employees’ needs and your administrative practices. Contact us to help review and modify your FSA plan provisions, handle forfeitures properly and prepare for next year’s enrollment cycle.

Increase your current business deductions under tangible property safe harbors

Management Advisory Services & Business Consulting|March 19, 2026

Did your business make repairs to tangible property, such as buildings, equipment or vehicles, in 2025? Such costs may be fully deductible on your 2025 income tax return — if they weren’t actually for “improvements” that must be depreciated over a period of years.

Betterment, restoration or adaptation

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized, with depreciation deductions spread over a few years or longer (depending on depreciation method and property type). An improvement occurred if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must capitalize amounts paid for work that’s reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that’s a material addition to a unit of property.

Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

Immediate deduction safe harbors

Costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. But distinguishing between repairs and improvements can be difficult. A few IRS safe harbors can help:

Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.

De minimis safe harbor. Amounts paid for tangible property can be currently deducted for tax purposes if those amounts are deducted for financial accounting purposes or in keeping your books and records. However, a dollar limit applies:

$5,000 if you have an “applicable financial statement,” generally meaning one that’s audited by a CPA, or
$2,500 if you don’t have an applicable financial statement.

Additional rules apply that may limit or eliminate your current deduction for a particular expense.

Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with average annual gross receipts of $10 million or less for the past three tax years.

A variety of tax-saving opportunities

As you can see, various options may be available to immediately deduct repair and maintenance costs safely. But keep in mind that improvements might also be eligible to be deducted immediately in certain circumstances, such as if they qualify for 100% bonus depreciation or Section 179 expensing. Contact us to discuss what you can deduct on your 2025 return and to start planning for tax-efficient repairs, maintenance and improvements in 2026.

Avoiding inadvertent S corp termination

Management Advisory Services & Business Consulting|March 5, 2026

S corporation structure provides most of the tax benefits of a partnership plus the liability protection of a corporation. But because of the strict requirements that apply to these entities, preserving S corporation status requires due diligence.

Reap the benefits

Like a traditional C corporation, an S corporation shields its shareholders from personal liability for the corporation’s debts. Like a partnership, an S corporation is a “pass-through” entity, which means that all of its profits and losses are passed through to the owners, who report their allocable shares on their personal income tax returns. This allows S corporations to avoid the double taxation of C corporations, whose income is taxed at the corporate level and again when distributed to shareholders.

To qualify as an S corporation, all of a corporation’s shareholders must file an election with the IRS on Form 2553, Election by a Small Business Corporation. In addition, the corporation must:

Be a domestic (U.S.) corporation,
Have no more than 100 shareholders (certain family members are treated as a single shareholder for this purpose),
Have only “allowable” shareholders (see below),
Have only one class of stock (generally, that means that all stock confers identical rights to distributions and liquidation proceeds; differences in voting rights are permissible), and
Not be an “ineligible” corporation, such as an insurance company, a domestic international sales corporation (DISC) or a certain type of financial institution.

Allowable shareholders include individuals, estates and certain trusts, such as a qualified Subchapter S trust (QSST) and an electing small business trust (ESBT). Partnerships, corporations and nonresident aliens are ineligible.

Preserve and protect

To avoid inadvertent termination of S corporation status, among other things, you should:

Continually monitor the number and type of shareholders, scrutinize the terms of any trusts that hold shares, and ensure that QSSTs or ESBTs have filed timely elections,
Include provisions in buy-sell agreements that prevent transfers to ineligible shareholders,
Make sure that if shares are transferred to an ESBT, all potential current beneficiaries are eligible shareholders, and
Be aware that if shares are held by grantor or testamentary trusts, these types of trusts are eligible shareholders for only two years after the grantor dies or the trust receives the stock. So track the two-year eligibility period and make sure trusts convert into QSSTs or ESBTs or transfer their shares to an eligible shareholder before the period expires.

Also, avoid actions that may be deemed to create a second class of stock, such as making disproportionate distributions.

Stay focused

Avoiding inadvertent termination of your company’s S corporation status is critical. Termination generally will result in the loss of substantial tax benefits. You may be able to get the IRS to retroactively restore your S status, but it can be an expensive, time-consuming process. So stay focused on maintaining compliance with all S corporation requirements. Contact us if you have questions.

Important 2026 tax figures for businesses

Management Advisory Services & Business Consulting|February 10, 2026

A new year brings many new tax-related figures for businesses. Here’s an overview of key figures for 2026. Be aware that exceptions or additional rules or limits may apply.

Depreciation-related tax breaks

Bonus depreciation: 100%
Section 179 expensing limit: $2.56 million
Section 179 phaseout threshold: $4.09 million

Qualified retirement plan limits

401(k), 403(b) and 457 plan deferrals: $24,500
401(k), 403(b) and 457 plan catch-up contributions for those age 50 or older: $8,000
401(k), 403(b) and 457 plan additional catch-up contributions for those age 60, 61, 62 or 63: $3,250
SIMPLE deferrals: $17,000
SIMPLE catch-up contributions for those age 50 or older: $4,000
SIMPLE additional catch-up contributions for those age 60, 61, 62 or 63: $1,250
Contributions to defined contribution plans: $72,000
Annual benefit limit for defined benefit plans: $290,000
Compensation defining highly compensated employee: $160,000
Compensation defining key employee (officer) in a top-heavy plan: $235,000
Compensation triggering Simplified Employee Pension contribution requirement: $800

Other benefits limits

Health Savings Account (HSA) contributions: $4,400 for individuals, $8,750 for family coverage
Health Flexible Spending Account (FSA) contributions: $3,400
Health FSA rollover: $680
Child and dependent care FSA contributions: $7,500
Employer contributions to Trump account: $2,500
Monthly commuter highway vehicle and transit pass: $340
Monthly qualified parking: $340

Miscellaneous business-related limits

Income range over which the Section 199A qualified business income deduction limitations phase in: $201,750 – $276,750 (double those amounts for married couples filing jointly)
Threshold for the excess business loss limitation: $256,000 (double that amount for joint filers) — note that this is a reduction from 2025
Limitation on the use of the cash method of accounting: $32 million (also affects other tax items, such as the exemption from the 30% interest expense deduction limit)

Planning for 2026

We can help you factor these changes and others into your 2026 tax planning. Contact us to get started.

Not all “business” expenses are tax deductible

Management Advisory Services & Business Consulting|January 29, 2026

Valuation professionals often use discounted cash flow (DCF) techniques to determine the value of a business or estimate economic losses. A critical input in a DCF model is the cost of capital — the rate that’s used to discount future earnings to today’s dollars. Modest changes in this rate can have a major impact on the expert’s conclusion, so it’s important to get it right.

Financing options

The cost of capital represents the expected rate of return that the market requires to attract funds to a particular investment. It’s based on the perceived risk of the investment. All else equal, as risk increases, the discount rate rises, and the value of the business or investment falls (and vice versa).

The cost of capital depends in part on whether the business is financed with 100% equity or a combination of equity and debt. In most cases, debt financing costs less than equity capital. Why? Debt holders receive regular economic benefits (principal and interest payments). But equity investors receive dividends only at management’s discretion, and they must wait until a sale to receive any capital appreciation, making their returns inherently less certain and thus the cost of equity higher.

Estimating the cost of equity

Several market-based components can be used to estimate the cost of equity. These typically include:

A risk-free rate, based on U.S. Treasury securities,
A market risk premium, based on historical returns for a stock index over the risk-free rate, and
A company-specific risk premium, based on the subject company’s financial performance, industry and other attributes.

The cost of equity is used as the cost of capital when the subject company is financed entirely with equity or when the valuation expert discounts earnings available only to equity investors.

Calculating the WACC

When discounting the earnings available to both equity investors and creditors, valuators typically use a weighted average cost of capital (WACC). This rate incorporates the costs of both equity and debt financing, based on an assumed capital structure.

The cost of debt is generally derived from market-based borrowing rates available to the subject company, taking into account credit risk, collateral and prevailing lending conditions. As leverage increases, creditors typically demand higher interest rates to compensate for incremental risk. Interest expense is generally tax-deductible, which reduces the effective cost of debt. But valuators must consider current limitations on interest deductibility, particularly for larger companies subject to earnings-based caps under current tax law.

Selecting the appropriate capital structure

When using WACC as the discount rate, a valuator can choose various capital structures. What’s appropriate depends on the characteristics of the company and the applicable valuation standard.

For example, an expert might apply the subject company’s historical or expected percentages of debt and equity capital when valuing a business interest that lacks control over financing decisions. Alternatively, an expert might choose an industry average capital structure when calculating lost profits or valuing a controlling interest in the business.

What’s appropriate for your situation?

The cost of capital is a critical input in DCF models. The appropriate rate is determined on a case-by-case basis, depending on the facts and circumstances. Contact us for more information on developing and supporting cost of capital assumptions in today’s uncertain marketplace.

New deduction for QPP can save significant taxes for manufacturers and similar businesses

Management Advisory Services & Business Consulting|January 22, 2026

The One Big Beautiful Bill Act (OBBBA) allows 100% first-year depreciation for nonresidential real estate that’s classified as qualified production property (QPP). This new break is different from the first-year bonus depreciation that’s available for assets such as tangible property with a recovery period of 20 years or less and qualified improvement property with a 15-year recovery period. Normally, nonresidential buildings must be depreciated over 39 years.

What is QPP?

The statutory definition of QPP is a bit complicated:

QPP is the portion of any nonresidential real estate that’s used by the taxpayer (your business) as an integral part of a qualified production activity.
A qualified production activity is the manufacturing, production or refining of a qualified product.
A qualified product is any tangible personal property that isn’t a food or beverage prepared in the same building as a retail establishment in which the property is sold. (So a restaurant building can’t be QPP.)

In addition, an activity doesn’t constitute manufacturing, production or refining of a qualified product unless the activity results in a substantial transformation of the property comprising the product.

To sum up these rules, QPP generally means factory buildings. But additional rules apply.

Meeting the placed-in-service rules

QPP 100% first-year depreciation is available for property whose construction begins after January 19, 2025, and before 2029. The property generally must be placed in service in the United States or a U.S. possession before 2031. In addition, the original use of the property generally must commence with the taxpayer.

There’s an exception to the original-use rule. The QPP deduction can be claimed for a previously used nonresidential building that:

Is acquired by the taxpayer after January 19, 2025, and before 2029,
Wasn’t used in a qualified production activity between January 1, 2021, and May 12, 2025,
Wasn’t used by the taxpayer before being acquired,
Is used by the taxpayer as an integral part of a qualified production activity, and
Is placed in service in the United States or a U.S. possession before 2031.

Also, the IRS can extend the before-2031 placed-in-service deadline for property that otherwise meets the requirements to be QPP if an Act of God (as defined) prevents the taxpayer from placing the property in service before the deadline.

Pitfalls to watch out for

While potentially valuable, 100% first-year deprecation for QPP isn’t without pitfalls:

Leased-out buildings. To be QPP, the building must be used by the taxpayer for a qualified production activity. So, if you’re the lessor of a building, you can’t treat it as QPP even if it’s used by a lessee for a qualified production activity.

Nonqualified activities. You can’t treat as QPP any area of a building that’s used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering activities or other functions unrelated to the manufacturing, production or refining of tangible personal property.

Ordinary income recapture rule. If at any time during the 10-year period beginning on the date that QPP is placed in service the property ceases to be used for a qualified production activity, an ordinary income depreciation recapture rule will apply.

IRS guidance expected

QPP 100% first-year depreciation can be a valuable tax break if you have eligible property. However, it could be challenging to identify and allocate costs to portions of buildings that are used only for nonqualifying activities or for several activities, not all of which are qualifying activities. Also, once made, the election can’t be revoked without IRS consent. IRS guidance on this new deduction is expected. Contact us with questions and to learn about the latest developments.

What you need to know about deducting business gifts

Management Advisory Services & Business Consulting|January 6, 2026

Thoughtful business gifts are a great way to show appreciation to customers and employees. They can also deliver tax benefits when handled correctly. Unfortunately, the IRS limits most business gift deductions to $25 per person per year, a cap that hasn’t changed since 1962. Still, with careful planning and good recordkeeping, you may be able to maximize your deductions.

When the $25 rule doesn’t apply

Several exceptions to the $25-per-person rule can help you deduct more of your gift expenses:

Gifts to businesses. The $25 limit applies only to gifts made directly or indirectly to an individual. Gifts given to a company for use in its business — such as an industry reference book or office equipment — are fully deductible because they serve a business purpose. However, if the gift primarily benefits a specific individual at that company, the $25 limit applies.

Gifts to married couples. When both spouses have a business relationship with you and the gift is for both of them, the limit generally doubles to $50.

Incidental costs. The expenses of personalizing, packaging, insuring or mailing a gift don’t count toward the $25 limit and are fully deductible.

Employee gifts. Cash or cash-equivalent gifts (such as gift cards) are treated as taxable wages and generally are deductible as compensation. However, noncash, low-cost items — like company-branded merchandise, small holiday gifts, or occasional meals and parties — can qualify as nontaxable “de minimis” fringe benefits. These are deductible to the business and tax-free to the employee.

How entertainment gifts are treated now

Under the Tax Cuts and Jobs Act, most entertainment expenses are no longer deductible. This includes tickets to sporting events, concerts and other entertainment, even when related to business. However, if you give event tickets as a gift and don’t attend yourself, you may be able to classify the cost as a business gift, subject to the $25 limit and any applicable exceptions.

Note that meals provided during an entertainment event may still be 50% deductible if they’re separately stated on the invoice.

Why good recordkeeping matters

To claim the full deductions you’re entitled to, document your gifts properly. Record each gift’s description, cost, date and business purpose and the relationship of the recipient to your business. Digital records are acceptable — such as accounting notes or CRM entries — as long as they clearly support the deduction.

Track qualifying expenses separately in your books. That way they can be easily identified.

Make your business gifts count

A little knowledge and planning can go a long way toward ensuring your business gifts are both meaningful and tax-smart. If you’d like help reviewing your company’s gift-giving policies or want to confirm how the deduction rules apply to your situation, contact our office. We’ll help your business keep compliant with tax law while you show appreciation to your customers and employees.

The tax traps of personally guaranteeing a loan to your corporation

Management Advisory Services & Business Consulting|December 4, 2025

If you’re considering guaranteeing, or are asked to guarantee, a loan to your closely held corporation, it’s important to understand the potential tax consequences. Acting as a guarantor, endorser or indemnitor means that if the corporation defaults, you could be responsible for repaying the loan. Without planning ahead, you may face unexpected tax implications.

A business bad debt

If you’re compelled to make good on the obligation, the payment of principal or interest in discharge of the obligation generally results in a bad debt deduction. This may be either a business or a nonbusiness bad debt deduction. If it’s a business bad debt, it’s deductible against ordinary income. A business bad debt can be either totally or partly worthless. If it’s a nonbusiness bad debt, it’s deductible as a short-term capital loss, which is subject to certain limitations. A nonbusiness bad debt is deductible only if it’s totally worthless.

To be treated as a business bad debt, the guarantee must be closely related to your trade or business. If the reason for guaranteeing the corporation loan is to protect your job, the guarantee is considered closely related to your trade or business as an employee. But employment must be the dominant motive. If your annual salary exceeds your investment in the corporation, this generally shows that the dominant motive for the guarantee is to protect your job. On the other hand, if your investment in the corporation substantially exceeds your annual salary, that’s evidence that the guarantee is primarily to protect your investment rather than your job.

Proving the relationship

Except in the case of job guarantees, it may be difficult to show the guarantee is closely related to your trade or business. You have to show that the guarantee is related to your business as a promoter, or that the guarantee is related to some other trade or business separately carried on by you.

If the reason for guaranteeing your corporation’s loan isn’t closely related to your trade or business and you’re required to pay off the loan, you can take a nonbusiness bad debt deduction if you show that your reason for the guarantee was to protect your investment, or you entered the guarantee transaction with a profit motive.

Note: The IRS and courts will scrutinize the dominant motive carefully. Reasonable compensation doesn’t always mean money. It can include protecting employment or business interests.

Additional requirements

In addition to satisfying the above requirements, a business or nonbusiness bad debt is deductible only if you meet these three conditions:

You have a legal duty to make the guaranty payment (although there’s no requirement that a legal action be brought against you).
The guaranty agreement is entered into before the debt becomes worthless.
You receive reasonable consideration (not necessarily cash or property) for entering into the guaranty agreement.

Any payment you make on a loan you guaranteed is deductible as a bad debt in the year you make it, unless the agreement (or local law) provides for a right of subrogation against the corporation. If you have this right, or some other right to demand payment from the corporation, you can’t take a bad debt deduction until the rights become partly or totally worthless.

These are only some of the possible tax consequences of guaranteeing a loan to your closely held corporation. Consult with us to learn all the implications and to help ensure the best tax results.

Should your business maximize deductions for real estate improvements now or spread them out?

Management Advisory Services & Business Consulting|November 13, 2025

Commercial real estate usually must be depreciated over 39 years. But certain real estate improvements — specifically, qualified improvement property (QIP) — are eligible for accelerated depreciation and can even be fully deducted immediately. While maximizing first-year depreciation is often beneficial, it’s not always the best tax move.

QIP defined

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was placed in service. But expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP.

QIP has a 15-year depreciation period. It’s also eligible for bonus depreciation and Section 179 expensing.

100% bonus depreciation

Additional first-year bonus depreciation is available for eligible assets, including QIP. The One Big Beautiful Bill Act (OBBBA), signed into law in July, increases bonus depreciation to 100% for assets acquired and placed in service after Jan. 19, 2025. It also makes 100% bonus depreciation permanent.

But be aware that bonus depreciation is only 40% for assets acquired Jan. 1, 2025, through Jan. 19, 2025, and placed in service any time in 2025. So, if your objective is to maximize first-year deductions on QIP acquired during that period, you’d claim the Sec. 179 deduction first. (See below.) If you max out on that, then you’d claim 40% first-year bonus depreciation.

In some cases, a business may not be eligible for bonus depreciation. Examples include real estate businesses that elect to deduct 100% of their business interest expense and dealerships with floor-plan financing — if they have average annual gross receipts exceeding $31 million for the previous three tax years.

Sec. 179 expensing

Similar to 100% bonus depreciation, Sec. 179 expensing allows you to immediately deduct (rather than depreciate over a number of years) the cost of purchasing eligible assets, including QIP. But the break is subject to annual dollar limits, which the OBBBA increases.

For qualifying assets placed in service in tax years beginning in 2025, the maximum allowable Section 179 depreciation deduction is $2.5 million (up from $1.25 million before the OBBBA). In addition, the break begins to phase out dollar-for-dollar when asset acquisitions for the year exceed $4 million (up from $3.13 million before the OBBBA). These amounts will continue to be annually adjusted for inflation after 2025.

Another restriction is that you can claim Sec. 179 expensing only to offset net income. The deduction can’t reduce net income below zero to create an overall business tax loss.

One advantage over bonus depreciation is that, for Sec. 179 expensing purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems, and security systems that are placed in service after the building is first placed in service.

Spreading out QIP depreciation

There are a few reasons why it may be more beneficial to spread out QIP depreciation over 15 years rather than claiming large first-year depreciation deductions:

Bonus depreciation can trigger the excess business loss rule. Although you can claim 100% first-year bonus depreciation even if it will create a tax loss, you could inadvertently trigger the excess business loss rule.

The rule limits deductions for current-year business losses incurred by noncorporate taxpayers: Such losses generally can offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains, only up to the applicable limit. For 2025, the limit is $313,000 ($626,000 for a married joint filer).

As a result, your 100% first-year bonus depreciation deduction might effectively be limited by the excess business loss rule. However, any excess business loss is carried over to the following tax year and can then be deducted under the rules for net operating loss carryforwards.

Large first-year deductions can result in higher-taxed gain when QIP is sold. First-year bonus depreciation and Sec. 179 deductions claimed for QIP can create depreciation recapture that’s taxed at your ordinary income rate when the QIP is sold. Under rates made permanent by the OBBBA, the maximum individual rate on ordinary income is 37%. You may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

Depreciation deductions may be worth more in the future. When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If you’re in a higher income tax bracket in the future or federal income tax rates go up, you’ll have effectively traded potentially more valuable future-year depreciation deductions for less-valuable first-year deductions.

Keep in mind that, while the OBBBA did “permanently” extend current rates, that only means they have no expiration date. Lawmakers could still increase rates in the future.

What’s best for you

Many factors must be considered before deciding whether to maximize QIP first-year depreciation deductions or spread out the deductions over multiple years. We can help you determine what’s best for your situation.

Should your business consider a fiscal year end?

Options for forfeited employee FSA balances

Increase your current business deductions under tangible property safe harbors

Avoiding inadvertent S corp termination

Important 2026 tax figures for businesses

Not all “business” expenses are tax deductible

New deduction for QPP can save significant taxes for manufacturers and similar businesses

What you need to know about deducting business gifts

The tax traps of personally guaranteeing a loan to your corporation

Should your business maximize deductions for real estate improvements now or spread them out?

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