What is the relationship between Class Life and bonus depreciation eligibility?
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The relationship between "class life" and bonus depreciation eligibility is central to determining whether a particular asset qualifies for bonus depreciation under the Internal Revenue Code (IRC), specifically section 168(k).
1. Definition of Class Life
- Class life is a term defined in IRC §168(i)(1) as the class life that would be applicable to property as of January 1, 1986, under the former ADR (Asset Depreciation Range) system, as set forth in IRS guidance (notably Rev. Proc. 87-56). Class lives are used to assign property to specific recovery periods for depreciation purposes.
2. Bonus Depreciation Eligibility and Class Life
- Bonus depreciation (also called the "special depreciation allowance") is an additional first-year depreciation deduction for certain qualified property. Under IRC §168(k), to be eligible for bonus depreciation, property must generally:
- Be tangible property to which MACRS applies,
- Have a recovery period of 20 years or less,
- Be computer software as defined in §167(f)(1),
- Be water utility property, or
- Be certain qualified film, television, or live theatrical productions.
- The recovery period is determined by the property's class life. The table in IRC §168(c) and the class life tables in Rev. Proc. 87-56 (and IRS Publication 946) assign recovery periods based on class life:
- 3-year property: class life of 4 years or less
- 5-year property: class life of more than 4 but less than 10 years
- 7-year property: class life of 10 or more but less than 16 years
- 10-year property: class life of 16 or more but less than 20 years
- 15-year property: class life of 20 or more but less than 25 years
- 20-year property: class life of 25 years or more
- Bonus depreciation is only available for property with a recovery period of 20 years or less. Thus, if an asset's class life results in a recovery period of 20 years or less, it is eligible for bonus depreciation. If the class life results in a longer recovery period (such as 25, 27.5, 39, or 50 years), the property is not eligible for bonus depreciation.
3. Practical Application
- For example, most machinery and equipment used in manufacturing have class lives that result in 5- or 7-year recovery periods, making them eligible for bonus depreciation.
- Nonresidential real property (class life of 39 years) and residential rental property (class life of 27.5 years) are not eligible for bonus depreciation because their recovery periods exceed 20 years.
- Qualified improvement property (QIP) is specifically assigned a 15-year recovery period, making it eligible for bonus depreciation.
4. Recent Law Changes (OBBBA/2025)
- The One Big Beautiful Bill Act (OBBBA) made 100% bonus depreciation permanent for property acquired after January 19, 2025, but the requirement that the property have a recovery period of 20 years or less remains unchanged.
- The OBBBA also introduced a temporary 100% expensing provision for certain "qualified production property," which can include some building property that would otherwise have a 39-year recovery period, but only if it meets specific requirements (such as being used in a qualified production activity, original use, and placed in service within certain dates).
5. Summary Table
7. Conclusion
The class life of an asset determines its recovery period under MACRS, and only property with a recovery period of 20 years or less (as determined by class life) is eligible for bonus depreciation. This makes the correct assignment of class life critical for maximizing bonus depreciation deductions.
In summary:
- Class life → Recovery period
- Recovery period ≤ 20 years → Eligible for bonus depreciation
- Recovery period > 20 years → Not eligible for bonus depreciation
This relationship is foundational to bonus depreciation planning and compliance.
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