Are there new limitations or requirements for bonus depreciation under the OBBBA?
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Yes, the One Big Beautiful Bill Act (OBBBA), enacted in 2025, makes significant changes to bonus depreciation under IRC §168(k). Here is a comprehensive summary of the new limitations and requirements for bonus depreciation as established by the OBBBA, with references to the relevant statutory language and supporting analysis:
1. Restoration and Permanence of 100% Bonus Depreciation
- Permanent 100% Expensing: The OBBBA restores and makes permanent the 100% bonus depreciation for qualified property. This means that, for property acquired and placed in service after January 19, 2025, taxpayers may immediately deduct the full cost of most tangible property with a recovery period of 20 years or less, as well as certain other qualifying property, in the year the property is placed in service. This reverses the prior law’s phase-down schedule, which would have reduced bonus depreciation to 40% in 2025, 20% in 2026, and 0% thereafter.
- Statutory Reference:
- "Section 168(k)(1)(A) is amended by striking 'the applicable percentage' and inserting '100 percent'".
- Effective Date:
- Applies to property acquired after January 19, 2025 (with special rules for binding contracts entered into before this date).
2. Transitional Election for Reduced Bonus Depreciation
- Transition Rule for 2025: For property placed in service during the first taxable year ending after January 19, 2025, taxpayers may elect to apply a reduced bonus depreciation percentage—40% for most property, or 60% for certain property with longer production periods or certain aircraft. This is a one-time transitional election.
- Statutory Reference:
- "In the case of qualified property placed in service by the taxpayer during the first taxable year ending after January 19, 2025, if the taxpayer elects to have this paragraph apply for such taxable year, paragraph (1)(A) shall be applied—(i) in the case of property which is not described in clause (ii), by substituting '40 percent' for '100 percent', or (ii) in the case of property which is described in subparagraph (B) or (C) of paragraph (2), by substituting '60 percent' for '100 percent'".
3. Qualified Property Definition and Exclusions
- Qualified Property: The definition of qualified property remains largely unchanged. It includes most tangible property with a recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property, among others.
- Exclusions: Property required to be depreciated under the Alternative Depreciation System (ADS) is not eligible for bonus depreciation. This includes property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, imported property covered by an Executive Order, and certain other categories.
- Inherited and Gifted Property: Property acquired by gift or inheritance does not qualify for bonus depreciation.
4. Special Allowance for Qualified Production Property
- New 100% Expensing for Certain Structures: The OBBBA introduces a new special depreciation allowance under IRC §168(n) for "qualified production property," which is defined as the portion of nonresidential real property used as an integral part of a qualified production activity (e.g., manufacturing, production, or refining of tangible personal property). This property must be placed in service in the U.S. or a U.S. possession, with original use commencing with the taxpayer, and construction beginning after January 19, 2025, and before January 1, 2029.
- Exclusions: Office space, administrative services, lodging, parking, sales, research, software development, and other non-production functions are excluded from the definition of qualified production property.
- Recapture: If the property ceases to be used in qualified production within 10 years, recapture rules apply, treating the property as disposed of and requiring ordinary income recapture under IRC §1245.
5. Order of Application and Coordination with Section 179
- Order of Deductions: Section 179 expensing must be applied before bonus depreciation. After applying both, any remaining basis is depreciated under MACRS.
6. No Annual Dollar Cap or Income Limitation
- No Cap: Unlike Section 179, bonus depreciation under §168(k) has no annual dollar cap or income limitation.
7. Election Out of Bonus Depreciation
- Class Election: Taxpayers may elect out of bonus depreciation for any class of property for a given tax year. Once made, the election is irrevocable for that class and year.
8. Recapture on Disposition
- Ordinary Income Recapture: Upon disposition of property for which bonus depreciation was claimed, any gain up to the amount of bonus depreciation previously allowed or allowable is recaptured as ordinary income.
9. Effective Dates and Transition Rules
- General Effective Date: The new 100% bonus depreciation rules apply to property acquired after January 19, 2025, and placed in service after that date. For property acquired under a binding contract before January 20, 2025, the prior phase-down schedule applies.
- Special Rule for Plants: For certain plants bearing fruits and nuts, the new rules apply to those planted or grafted after January 19, 2025.
10. Interaction with International Tax and Pillar 2
- Global Minimum Tax Considerations: The restoration of 100% bonus depreciation may lower the effective tax rate of U.S. subsidiaries of foreign-parented multinationals, potentially triggering top-up taxes under OECD Pillar 2 rules in the parent’s jurisdiction if the U.S. effective tax rate falls below 15%. Deferred tax accounting and recapture rules under GLOBE Article 4.4.4 may mitigate this effect, but only for a five-year window.
11. Summary Table of Key OBBBA Bonus Depreciation Provisions:
Conclusion:
The OBBBA makes 100% bonus depreciation permanent for most qualifying property acquired and placed in service after January 19, 2025, introduces a new 100% expensing provision for certain production-related structures, and provides a transitional election for 2025. The law also clarifies the order of application with Section 179, maintains the ability to elect out by class, and includes recapture provisions. These changes are designed to encourage investment by allowing immediate expensing, but taxpayers should be aware of the international tax implications, especially under OECD Pillar 2 rules.
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