What are the bonus depreciation limits for property placed in service under the 2025 tax law?
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Under the 2025 tax law, as amended by the One Big Beautiful Bill Act (OBBBA), the rules for bonus depreciation have changed significantly. Here is a comprehensive summary of the bonus depreciation limits for property placed in service in 2025 and beyond:
1. Permanent 100% Bonus Depreciation for Qualified Property (Section 168(k))
- For property acquired and placed in service after January 19, 2025, the bonus depreciation rate is permanently restored to 100%. This means taxpayers can immediately expense the entire cost of most qualified property in the year it is placed in service, rather than depreciating it over several years.
- This reverses the previous phase-down schedule, which would have reduced bonus depreciation to 40% for property placed in service in 2025 and eliminated it entirely by 2027.
Qualified Property
- Most tangible property with a MACRS recovery period of 20 years or less (e.g., machinery, equipment, computers, furniture, land improvements).
- Certain computer software, water utility property, and qualified film, television, and live theatrical productions.
- Both new and used property are eligible, provided the acquisition and use requirements are met (i.e., the property was not previously used by the taxpayer or a related party, and the acquisition was not from a related party).
Acquisition Date
- To qualify for 100% bonus depreciation, the property must be acquired after January 19, 2025. The acquisition date is generally the date a written binding contract is entered into.
Transition Rule for 2025
- For property acquired or subject to a binding contract before January 20, 2025, and placed in service in 2025, the original phase-down rates (40% for most property, 60% for certain long production period property and aircraft) still apply.
- Taxpayers may elect to apply the lower phase-down rate for property placed in service in the first taxable year ending after January 19, 2025, if desired.
Electing Out
- Taxpayers may elect out of bonus depreciation for any class of property for any taxable year.
2. Qualified Production Property (Section 168(n))
- OBBBA introduces a new provision, Section 168(n), allowing 100% expensing for certain nonresidential real property used in a qualified production activity (manufacturing, production, refining, agricultural, or chemical production).
- To qualify:
- Construction must begin after January 19, 2025, and before January 1, 2029.
- Property must be placed in service in the U.S. before January 1, 2031.
- The original use must begin with the taxpayer, or, for acquired property, it must not have been used in a qualified production activity between January 1, 2021, and May 12, 2025.
- The property must be used as an integral part of a qualified production activity.
- The taxpayer must elect to treat the property as qualified production property.
- Portions of buildings used for offices, administration, sales, research, software development, or other non-production functions are excluded from this benefit.
- If the property ceases to be used in a qualified production activity within 10 years, the benefit is subject to recapture.
3. Other Key Points
- Section 179 Expensing: The maximum Section 179 deduction is increased to $2.5 million, with a phase-out threshold of $4 million for taxable years beginning after December 31, 2024, and both amounts indexed for inflation after 2025. Section 179 remains important for property types not eligible for bonus depreciation, such as certain improvements to nonresidential real property.
- State Conformity: Not all states conform to federal bonus depreciation rules. Taxpayers should check state law to determine if bonus depreciation is allowed or if adjustments are required.
4. Summary Table of Bonus Depreciation Rates for 2025
5. Recapture and Compliance
- If property for which bonus depreciation or QPP expensing is claimed is disposed of or ceases to be used in a qualified activity within a specified period (10 years for QPP), recapture of the benefit as ordinary income is required.
In summary: For most property placed in service after January 19, 2025, the bonus depreciation limit is 100% of the cost, with no dollar cap, and applies to both new and used property with a recovery period of 20 years or less. Special rules and elections apply for property acquired or under contract before that date, and for qualified production property under the new Section 168(n). Taxpayers should carefully document acquisition dates, placed-in-service dates, and property use to substantiate eligibility.
If you have a specific property or scenario in mind, please provide more details for a tailored analysis.
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