What documentation is required to claim bonus depreciation under the updated 2025 tax regulations?
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To claim bonus depreciation under the updated 2025 tax regulations, taxpayers must maintain and, if requested, provide specific documentation that substantiates their entitlement to the deduction. The requirements are rooted in the Internal Revenue Code, Treasury Regulations, IRS forms and instructions, and IRS audit guidance. Below is a comprehensive explanation of the documentation required, the rationale for each, and best practices for compliance.
1. Identification and Substantiation of Qualified Property
a. Property Description and Classification- Taxpayers must maintain records that clearly identify each asset for which bonus depreciation is claimed. This includes a description of the property, its use, and its classification under MACRS (e.g., 5-year, 7-year property, etc.).- The property must be tangible property depreciated under MACRS with a recovery period of 20 years or less, certain computer software, water utility property, or qualified improvement property, among others.
b. Acquisition and Placed-in-Service Dates- Documentation must show the date the property was acquired and the date it was placed in service. This is critical because bonus depreciation is only available for property acquired and placed in service within specific timeframes.- For property acquired after January 19, 2025, and placed in service after that date, 100% bonus depreciation is available under the new law.
c. Proof of Acquisition- For purchased property: Keep purchase agreements, invoices, bills of sale, and proof of payment.- For self-constructed property: Maintain construction contracts, progress payment applications (e.g., AIA Forms G702/G703), and records showing when physical work of a significant nature began (or when 10% of total costs were incurred, if using the safe harbor).
d. Original Use or Used Property Requirements- For new property, records must show that the original use began with the taxpayer.- For used property, documentation must establish that the property was not previously used by the taxpayer or a related party within the lookback period, and that the acquisition was not from a related party or via a carryover basis transaction.
2. Calculation and Allocation of Basis
a. Cost Basis- Maintain records of the cost or other basis of the property, including any adjustments for credits, Section 179 deductions, or other basis reductions.
b. Allocation of Costs- For property acquired as part of a larger project (e.g., a building with segregated components), keep cost segregation studies, engineering reports, and supporting documentation that detail the allocation of costs to bonus-eligible property.
3. Elections and Statements
a. Election Out of Bonus Depreciation- If electing out of bonus depreciation for any class of property, attach a statement to the timely filed return (including extensions) indicating the class of property and the election.- If revoking an election, follow the procedures for amended returns or private letter ruling requests as specified in the regulations.
b. Election for Specified Plants- If electing to apply bonus depreciation to specified plants, attach a statement to the timely filed return identifying the plants and the election.
4. Tax Return Reporting
a. Form 4562 (Depreciation and Amortization)- Complete and file Form 4562 with the tax return for the year the property is placed in service. This form requires: - Description of the property - Date placed in service - Cost or other basis - Elected Section 179 cost (if any) - Special depreciation allowance claimed - Method and recovery period- For listed property (e.g., vehicles), complete Part V of Form 4562 and maintain detailed usage logs and substantiation of business use.
b. Supporting Schedules- Attach any required statements for elections, and maintain supporting schedules showing the calculation of bonus depreciation for each asset.
5. Supporting Documentation for Audit
a. Cost Segregation Studies- If a cost segregation study is used, retain the full report, including methodology, asset listings, engineering takeoffs, allocation of direct and indirect costs, and reconciliation to total project costs.
b. Construction and Acquisition Records- Keep all contracts, change orders, invoices, payment records, and delivery/acceptance documentation.
c. Asset Ledgers and Depreciation Schedules- Maintain detailed fixed asset ledgers and depreciation schedules that tie to the tax return and reflect the application of bonus depreciation.
d. Proof of Business Use- For listed property, maintain contemporaneous logs, mileage records, and evidence of business use exceeding 50% where required.
6. Special Considerations
a. Like-Kind Exchanges and Involuntary Conversions- For property acquired in a like-kind exchange or involuntary conversion, maintain documentation showing the allocation of basis between carryover and excess basis, as only the excess basis of used property is eligible for bonus depreciation.
b. Amended Returns and Accounting Method Changes- If bonus depreciation was not claimed in the original return, and the taxpayer is eligible to claim it, file an amended return or Form 3115 (Application for Change in Accounting Method) as appropriate, and retain all supporting documentation for the change.
7. Best Practices
- Contemporaneous Recordkeeping: Maintain all records contemporaneously with the acquisition and placement in service of the property.
- Reconciliation: Ensure that all asset listings, cost allocations, and depreciation schedules reconcile to the amounts reported on the tax return.
- Retention: Retain all documentation for as long as the property is subject to depreciation and for the period during which the IRS may assess additional tax (generally at least three years after the return is filed, but longer if there are net operating losses or other carryforwards).
8. Summary Table of Required Documentation:
In summary: To claim bonus depreciation under the 2025 regulations, taxpayers must maintain detailed records substantiating the eligibility, cost, acquisition, and use of each asset, file Form 4562 with the tax return, attach any required election statements, and retain all supporting documentation, including cost segregation studies and acquisition records, for IRS review. Proper documentation is essential to support the deduction and withstand IRS examination.
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