Are there any limitations or exclusions to claiming retroactive 100% bonus depreciation under the new legislation?
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Yes, there are important limitations and exclusions to claiming retroactive 100% bonus depreciation under the new legislation, specifically the One Big Beautiful Bill Act (OBBBA), which was enacted in 2025. Here is a detailed analysis of the relevant legal details, including the nuances and exceptions:
1. Acquisition Date and Binding Contract Rule
- Property must be acquired after January 19, 2025 to qualify for the new permanent 100% bonus depreciation. If a property is acquired under a binding written contract entered into before January 20, 2025, the acquisition date is deemed to be the contract date, not the date the property is placed in service. This means that property acquired under such a contract is not eligible for the new 100% bonus depreciation, even if placed in service after January 19, 2025. Instead, the original phase-down schedule (e.g., 60% in 2024, 40% in 2025, etc.) continues to apply to such property.
2. Qualified Property Definition
- The property must be "qualified property" as defined in IRC §168(k). This generally means:
- Tangible property with a recovery period of 20 years or less,
- Computer software as defined in §167(f)(1),
- Water utility property,
- Qualified film, television, and live theatrical productions,
- Certain plants bearing fruits and nuts,
- Qualified production property (for a temporary period, see below).
- Property required to be depreciated under the Alternative Depreciation System (ADS) is excluded from bonus depreciation. This includes property used predominantly outside the U.S., tax-exempt use property, tax-exempt bond-financed property, imported property subject to an executive order, and certain property held by electing real property or farming businesses.
3. Used Property and Related Party Rules
- Used property can qualify, but only if:
- The taxpayer did not use the property at any time before acquisition,
- The property was not acquired from a related party,
- The property was not acquired from a component member of a controlled group,
- The taxpayer’s basis is not determined by reference to the adjusted basis in the hands of the seller or transferor (e.g., not acquired in a like-kind exchange or from a decedent).
4. Exclusions for Certain Businesses and Property Types
- Public utility property (where rates are regulated by a government agency) and property used in a trade or business with floor-plan financing (e.g., auto dealerships) are excluded from bonus depreciation.
- Inherited property and property acquired by gift do not qualify for bonus depreciation.
5. Special Rule for Qualified Production Property
- The OBBBA introduces a new, temporary 100% expensing provision for "qualified production property" (certain nonresidential real property used in manufacturing, production, or refining). To qualify:
- The property must be used as an integral part of a qualified production activity,
- Placed in service in the U.S. or a U.S. possession,
- Original use must commence with the taxpayer,
- Construction must begin after January 19, 2025, and before January 1, 2029,
- The property must be placed in service before January 1, 2031,
- Leased property does not qualify,
- Portions of buildings used for nonproduction purposes (e.g., offices, R&D, sales) are excluded,
- A 10-year recapture rule applies: if the property ceases to be used in a qualified production activity within 10 years, some of the tax benefit may be recaptured.
6. Election Out and Transitional Elections
- Taxpayers may elect out of bonus depreciation for any class of property placed in service during the year. This election is irrevocable for that class and year.
- A transitional election allows a taxpayer to claim a reduced bonus depreciation percentage (e.g., 40% or 60% instead of 100%) for certain property, but only if the property is acquired or constructed under the relevant transitional rules.
7. No Retroactive Application for Property Acquired Before the Effective Date
- The new 100% bonus depreciation is not retroactive for property acquired before January 20, 2025, unless the property is acquired under a contract entered into after that date. Property acquired or constructed before this date remains subject to the phase-down schedule or prior law.
8. Other General Limitations
- Section 179 expensing must be applied before bonus depreciation.
- Bonus depreciation is not available for property required to be depreciated under ADS (see above).
- No annual dollar cap or income limitation applies to bonus depreciation, unlike Section 179.
Summary: The OBBBA’s restoration of 100% bonus depreciation is a powerful incentive, but it is not retroactive for property acquired or constructed before January 20, 2025, or for property acquired under a binding contract before that date. There are also exclusions for certain property types, businesses, and related party transactions. Special rules and limitations apply to the new category of qualified production property, including a 10-year recapture rule and strict use requirements. Taxpayers must carefully review acquisition dates, contract dates, property use, and eligibility to ensure compliance.
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