Federal depreciation rules significantly changed over the past 25 years, most recently from the Tax Cuts and Jobs Act of 2017 (TCJA) and the One Big Beautiful Bill Act of 2025 (OBBBA). Tennessee is a “rolling conformity” state, which, by default, follows federal tax law changes as they are enacted. However, in some cases, the legislature enacts “decoupling” legislation under which conformity to federal law may be limited or tied to the federal tax code as it existed as of a certain date in the past.
OBBBA Brings Back 100% Bonus Depreciation
The OBBBA reinstated 100% bonus depreciation for property acquired after Jan. 19, 2025, and also allows taxpayers who purchase Qualified Production Property (QPP) to elect to depreciate100% of the property’s cost. QPP is generally nonresidential real property, including structural components such as walls, roofs, and foundations, used in a production activity such as a factory or refinery, with construction of the property beginning between Jan. 19, 2025, and Dec. 31, 2028, and the property being placed in service before 2031. Many newly constructed factory buildings and similar structures in the United States may qualify as QPP. Certain buildings constructed prior to 2025 but purchased in 2025 and later years may also qualify as QPP if applicable conditions are met.
Tennessee Conforms to the TCJA for Purposes of Calculating Depreciation
Beginning in 2023, Tennessee began conforming to the federal depreciation rules as enacted pursuant to the TCJA. Under the TCJA, 80% bonus depreciation was allowed for assets placed in service in 2023. This dropped to 60% for assets acquired in 2024, 40% for assets acquired in 2025, and 20% for assets acquired in 2026. For assets placed in service in 2027 and later years, no bonus depreciation was permitted. For years prior to 2023, any federal bonus depreciation could not be taken in Tennessee and was required to be added back to the Tennessee tax base, and the asset was depreciated under normal MACRS accelerated depreciation rules.
Tennessee “statically” conforms to the TCJA’s depreciation rules and does not follow the OBBBA for purposes of calculating depreciation expense. Consequently, for assets placed in service in 2025, Tennessee allows for 40% bonus depreciation. This will drop to 20% in 2026 and, in 2027 and later years, Tennessee will not allow any bonus depreciation unless the legislature changes the state’s laws. Also, any 100% depreciation claimed for QPP is not allowed for Tennessee tax purposes. Such federal depreciation must be added back to the state tax base, and the assets will likely be depreciated over 39 years.
Tennessee Follows OBBBA’s Enhanced 179 Expensing
The OBBBA increased the amount that a business can immediately expense for purchases of most fixed assets and computer software under section 179 to $2.5 million. Tennessee follows the federal section 179 limits with no modifications needed. Consequently, businesses claiming bonus depreciation and that have a significant business presence in Tennessee may want to elect section 179 expensing instead.
If your company does a significant amount of business in Tennessee and has a sizeable amount of depreciable purchases, contact your CBIZ tax professional to understand how these changes to the tax laws affect your business.
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