How does placing property into production in 2025 affect my bonus depreciation deduction?
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Placing property into production (i.e., placing it in service) in 2025 has a significant impact on your bonus depreciation deduction due to recent legislative changes under the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025. Here’s a detailed analysis of how the timing of your placed-in-service date in 2025 affects your bonus depreciation deduction, with references to the Internal Revenue Code, Treasury Regulations, and authoritative commentary.
1. Background: Bonus Depreciation Phaseout and Restoration
Prior Law (Pre-OBBBA):- Under IRC §168(k), bonus depreciation for most qualified property was scheduled to phase down as follows: - 2023: 80% - 2024: 60% - 2025: 40% - 2026: 20% - 2027 and after: 0%- The applicable percentage was determined by the year the property was placed in service, not the year acquired.
New Law (OBBBA, effective July 4, 2025):- The OBBBA permanently restores 100% bonus depreciation for most qualified property acquired after January 19, 2025, and placed in service after that date.- For property acquired or for which a binding contract was in effect before January 20, 2025, the original phase-down schedule (40% for 2025) still applies.
2. Placed-in-Service Date: Why It Matters
Definition:- Under Reg. §1.167(a)-11(e)(1)(i), property is placed in service when it is “first placed in a condition or state of readiness and availability for a specifically assigned function.” Actual use is not required, but the property must be ready and available for its intended use.
Impact:- The bonus depreciation percentage is determined by the year the property is placed in service, not the year it is acquired or constructed.
3. 2025 Bonus Depreciation Rates: Key Dates
A. Property Placed in Service BEFORE January 20, 2025:- 40% bonus depreciation applies to most qualified property (unless it is long production period property or certain aircraft, which may have a different rate).
B. Property Placed in Service ON OR AFTER January 20, 2025:- 100% bonus depreciation applies to most qualified property acquired after January 19, 2025, and placed in service after that date.- If the property was acquired or subject to a binding contract before January 20, 2025, the 40% rate still applies, even if placed in service after that date.
C. Special Rule for Binding Contracts:- If a written binding contract to acquire the property was in effect before January 20, 2025, the property is treated as acquired on the contract date, and the lower (40%) rate applies.
4. Qualified Property
- Most tangible property with a MACRS recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property are eligible for bonus depreciation.
- Real property (39-year property) is generally not eligible, except for certain qualified improvement property and, under new law, certain “qualified production property” (see below).
5. Special Rule: Qualified Production Property (QPP) under IRC §168(n)
- The OBBBA introduces a new, temporary 100% bonus depreciation for “qualified production property,” which includes certain nonresidential real property used as an integral part of a qualified production activity (e.g., manufacturing, refining, agricultural production).
- To qualify, construction must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031.
- Leased property and portions of buildings used for non-production purposes (e.g., offices, R&D, sales) are excluded.
6. Practical Example
- If you place a new machine (5-year MACRS property) in service on January 15, 2025: You are eligible for 40% bonus depreciation on the cost of the machine.
- If you place the same machine in service on January 21, 2025, and it was acquired after January 19, 2025 (no binding contract before January 20): You are eligible for 100% bonus depreciation on the cost of the machine.
- If you entered into a binding contract to acquire the machine on January 10, 2025, but place it in service on February 1, 2025: The property is treated as acquired on January 10, 2025, so the 40% rate applies.
7. Other Considerations
- Section 179 Expensing: The OBBBA also increased the Section 179 expensing limit to $2,500,000, with a phase-out threshold of $4,000,000 for tax years beginning after December 31, 2024.
- Coordination: Section 179 expensing is applied before bonus depreciation. If you fully expense an asset under Section 179, you cannot also claim bonus depreciation on that asset.
- Recapture: If property for which you claimed bonus depreciation is disposed of or ceases to be used in a qualified manner within a certain period (e.g., 10 years for QPP), recapture rules may apply.
8. Summary Table
9. Planning Implications
- Accelerate or delay placed-in-service dates to maximize bonus depreciation. For example, if you can delay placing property in service until after January 19, 2025, and the property is not subject to a prior binding contract, you may be able to claim 100% bonus depreciation instead of 40%.
- Review binding contract dates carefully, as they control the acquisition date for bonus depreciation purposes.
- Segment mixed-use buildings to maximize the benefit for production areas under the new QPP rules.
In summary: Placing property into production in 2025 can result in either 40% or 100% bonus depreciation, depending on the placed-in-service date and the acquisition/binding contract date. For property placed in service after January 19, 2025, and acquired after that date (with no prior binding contract), 100% bonus depreciation is available. For property placed in service before January 20, 2025, or acquired under a binding contract before that date, only 40% bonus depreciation applies. The new law also introduces 100% bonus depreciation for certain production buildings, subject to additional requirements and elections.
Careful planning around these dates and contract terms is essential to maximize your bonus depreciation deduction in 2025.
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