What are the key differences in bonus depreciation treatment before and after the OBBBA?
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The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made significant changes to the treatment of bonus depreciation under IRC §168(k). Below is a comprehensive analysis of the key differences in bonus depreciation treatment before and after the OBBBA, with detailed references to the Internal Revenue Code, Treasury Regulations, and authoritative commentary.
1. Bonus Depreciation Rate and Permanency
Before OBBBA
- Phase-Down Schedule: Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was available for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. After that, the bonus depreciation rate was scheduled to phase down as follows:
- 80% for property placed in service in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- 0% in 2027 and later
- Temporary Provision: The phase-out meant that, absent further legislation, bonus depreciation would be unavailable for most property placed in service after 2026.
After OBBBA
- Permanent 100% Bonus Depreciation: OBBBA repealed the phase-down and made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. This means businesses can fully expense the cost of eligible property in the year it is placed in service, with no scheduled reduction in the bonus rate.
- Transition Rule: For property acquired under a binding contract before January 20, 2025, the original phase-down schedule still applies. Only property acquired after January 19, 2025, is eligible for permanent 100% bonus depreciation.
2. Eligible Property
Before OBBBA
- Qualified Property: Included MACRS property with a recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property (QIP) (after the CARES Act fix).
- New and Used Property: TCJA expanded eligibility to include used property, provided it was not previously used by the taxpayer or a related party.
- Exclusions: Property required to be depreciated under the Alternative Depreciation System (ADS), property used in certain regulated utility trades or businesses, and property used in a trade or business with floor plan financing indebtedness were excluded.
After OBBBA
- No Change in Core Eligibility: The definition of qualified property remains largely the same: MACRS property with a recovery period of 20 years or less, certain computer software, water utility property, and QIP.
- Permanent Inclusion of Used Property: The ability to claim bonus depreciation on used property continues, provided the acquisition requirements are met.
- No Expansion to Property Required to Use ADS: Property required to be depreciated under ADS (e.g., certain tax-exempt use property, property used predominantly outside the U.S., etc.) remains ineligible for bonus depreciation.
3. Acquisition Date and Binding Contract Rules
Before OBBBA
- Acquisition Date Critical: The applicable bonus depreciation rate depended on when the property was acquired (or when a binding contract was entered into), not just when it was placed in service.
- Binding Contract Rules: If property was acquired under a binding contract, the acquisition date was the date the contract became binding, not the date of actual purchase or placement in service.
After OBBBA
- Transition Rule Maintained: For property acquired under a binding contract before January 20, 2025, the pre-OBBBA phase-down schedule applies. For property acquired after January 19, 2025, 100% bonus depreciation is available permanently.
- Self-Constructed Property: The date construction begins is used to determine eligibility for the 100% rate. If construction begins after January 19, 2025, the property is eligible for permanent 100% bonus depreciation.
4. Special Expensing for Certain Structures (Qualified Production Property)
Before OBBBA
- No Full Expensing for Structures: Nonresidential real property (e.g., factories, warehouses) was generally depreciated over 39 years and not eligible for bonus depreciation, except for QIP.
After OBBBA
- New 100% Expensing for Qualified Production Property: OBBBA introduced IRC §168(n), allowing 100% bonus depreciation for certain nonresidential real property used as an integral part of a qualified production activity (e.g., manufacturing, production, or refining tangible personal property), if construction begins after January 19, 2025, and before January 1, 2029, and the property is placed in service before January 1, 2031.
- Exclusions: Office space, administrative, lodging, parking, sales, research, software development, and engineering activities are excluded from this provision.
5. Section 179 Expensing Limits
Before OBBBA
- Section 179 Limits: The maximum Section 179 deduction was $1,220,000 for 2024, with a phase-out threshold of $3,050,000.
After OBBBA
- Increased Limits: For tax years beginning after December 31, 2024, the Section 179 deduction limit is increased to $2,500,000, with a phase-out threshold of $4,000,000, both indexed for inflation after 2025.
6. Other Notable Changes
- No Change to Exclusions: Property required to use ADS, property used in certain regulated utility businesses, and property used in a trade or business with floor plan financing indebtedness remain ineligible for bonus depreciation.
- No Change to QIP Rules: Qualified improvement property remains eligible for bonus depreciation as 15-year property, provided it is not required to use ADS and is not excluded by other rules.
7. Practical and Policy Implications
- Certainty and Simplicity: The permanent extension of 100% bonus depreciation removes uncertainty for businesses, allowing for better long-term planning and investment decisions.
- Pro-Growth Incentive: Immediate expensing of capital investments is expected to encourage domestic investment and economic growth.
- Transition Complexity: The transition rules for property acquired under binding contracts before January 20, 2025, require careful tracking to determine the applicable bonus depreciation rate.
8. Summary Table: Key Differences
9. Conclusion
The OBBBA fundamentally changed bonus depreciation by making 100% expensing permanent for most tangible property with a recovery period of 20 years or less, for property acquired after January 19, 2025. It also introduced a new, temporary 100% expensing provision for certain production-related structures, increased Section 179 limits, and maintained the exclusion of property required to use ADS or used in certain trades or businesses. The transition rules for property acquired under binding contracts before January 20, 2025, require careful attention. These changes are designed to encourage domestic investment and provide long-term certainty for business planning.
For detailed application, taxpayers should consult the full text of IRC §168(k), §168(n), and related Treasury Regulations, as well as IRS guidance and transition rules.
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