In what ways does the OBBBA modify eligibility for bonus depreciation deductions?
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The One Big Beautiful Bill Act (OBBBA), enacted in 2025, makes several significant modifications to the eligibility and application of bonus depreciation deductions under the Internal Revenue Code. Below is a comprehensive analysis of these changes, referencing the relevant statutory provisions, Treasury regulations, and authoritative commentary.
1. Permanent Restoration of 100% Bonus Depreciation
Prior Law:Under IRC §168(k), as amended by the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was available for qualified property acquired and placed in service after September 27, 2017, but this benefit was scheduled to phase down (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% thereafter).
OBBBA Change:The OBBBA permanently restores 100% bonus depreciation for most qualified property acquired after January 19, 2025. This means that, for property acquired and placed in service after this date, taxpayers may immediately deduct the full cost of eligible property in the year it is placed in service, with no scheduled phase-down.
Key Points:- Applies to both new and used property, provided other requirements are met.- The acquisition date is generally the date a written binding contract is entered into; property acquired under a contract entered into before January 20, 2025, is treated as acquired on the contract date, which may affect eligibility.- The restoration of 100% bonus depreciation is intended to provide certainty and encourage capital investment by allowing immediate expensing of eligible property.
2. Expansion to Qualified Production Property (QPP) – New Section 168(n)
New Provision:The OBBBA introduces a new, temporary 100% bonus depreciation for "qualified production property" (QPP), a category of nonresidential real property (i.e., certain buildings and structures) that was previously ineligible for bonus depreciation due to its 39-year class life.
Eligibility Criteria for QPP:- The property must be nonresidential real property used as an integral part of a "qualified production activity" (manufacturing, production, or refining of tangible personal property, excluding food/beverage prepared in the same building as a retail establishment).- The property must be placed in service in the United States or a U.S. possession.- The original use must commence with the taxpayer.- Construction must begin after January 19, 2025, and before January 1, 2029.- The property must be designated by election on the taxpayer’s return.- The property must be placed in service before January 1, 2031.- Leased property and portions of buildings used for nonproduction purposes (e.g., offices, R&D, sales, parking, lodging) are excluded.- A special rule allows certain used property to qualify if it has not been used in a production activity since January 1, 2021.
Recapture Rule:If the property ceases to be used in a qualified production activity within 10 years, a recapture of the tax benefit may apply.
3. Clarification and Continuation of Eligibility for Used Property
Background:The TCJA expanded bonus depreciation to include used property, provided the taxpayer had not previously used the property and the acquisition was not from a related party or in a carryover basis transaction.
4. Transition Rule for Fiscal Year Taxpayers
For qualified property placed in service during the first taxable year ending after January 19, 2025, taxpayers may elect to apply a reduced bonus depreciation rate of 40% or 60%, depending on the property category, instead of 100%.
5. Section 179 Expensing Limitations Increased
While not strictly bonus depreciation, the OBBBA also increases the Section 179 expensing limit to $2,500,000 (with a phase-out threshold of $4,000,000) for property placed in service in taxable years beginning after December 31, 2024. This complements bonus depreciation by allowing more immediate expensing for smaller investments.
6. Other Technical and Conforming Changes
- Binding Contract Rule: The date of acquisition for bonus depreciation purposes is the date a written binding contract is entered into. This is critical for determining eligibility, especially for property under construction or with long lead times.
- Self-Constructed Property: For self-constructed property, the acquisition date is when physical work of a significant nature begins, not the date of contract.
- Exclusions: Property required to be depreciated under ADS, property used in certain regulated utility businesses, and property used in a trade or business with floor plan financing indebtedness (if the interest is deducted under §163(j)) remain ineligible for bonus depreciation.
7. Strategic and Practical Implications
- Taxpayers should review capital expenditure plans to ensure property is acquired and placed in service within the new eligibility windows.
- Segregation of building use is important for QPP, as only production areas qualify.
- Recapture risk for QPP should be considered in long-term planning.
- State conformity may vary, so state tax impacts should be separately analyzed.
8. Summary Table of Key OBBBA Bonus Depreciation Modifications
9. Conclusion
The OBBBA fundamentally enhances and expands the scope of bonus depreciation by making 100% expensing permanent for most qualified property, introducing a new temporary 100% deduction for certain production-related buildings, and increasing Section 179 expensing limits. These changes are designed to incentivize domestic investment and provide greater certainty and flexibility for business capital planning. However, taxpayers must carefully navigate the eligibility criteria, especially for QPP, and consider the interplay with other tax provisions and state law.
If you have specific property or transaction types in mind, further details can be provided regarding their eligibility under the new OBBBA rules.
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