100% Bonus Depreciation Is Back: Strategies for Implementation

Among the many provisions introduced in the One Big Beautiful Bill Act, the return of 100% bonus depreciation stands out as one of the most highly anticipated by taxpayers and tax professionals alike, and for good reason. 100% bonus depreciation is now permanently enacted as of January 20, 2025. Designed to encourage domestic economic investment, bonus depreciation is a special tax incentive that allows businesses to accelerate future depreciation deductions into the current tax year. This leads to improved cash flow, reduces current year federal tax liability, and frees up capital for further investment.

Prior to the passage of OBBBA, the future of bonus depreciation was uncertain. A phase-out of bonus depreciation from the Tax Cuts and Jobs Act of 2017 meant a reduction of bonus depreciation to 40% in 2025 and 20% in 2026 before expiring completely in 2027.

Although the concept of bonus depreciation seems straightforward, its implementation is governed by complex rules and limitations that demand careful planning. A thorough understanding of these nuances, along with awareness of alternative or complementary tax strategies, is essential for crafting a well-rounded and effective tax plan.

Account for Applicable Written Binding Contracts

Although 100% bonus depreciation is effective as of January 20, 2025, assets placed into service after that date don’t automatically qualify. Rather, the “written binding contract” date (when the taxpayer entered into a legal agreement to construct or acquire the property) dictates the applicable tax law and associated bonus percentage. Under existing guidance, a written binding contract is generally defined as an agreement enforceable under state law, where cancellation damages are not insignificant, typically equal to at least 5% of the total contract price.

Written binding contracts are an especially important consideration for newly constructed real estate that was placed into service in 2025. If physical construction work of significant nature (10% of hard construction) occurred prior to January 20, 2025, the property may be subject to prior TCJA bonus legislation, meaning only 40% bonus depreciation if placed into service 2025. For example, if construction of a large office building commenced in 2023, was 80% complete in January 2025, and was finally finished and placed into service in August 2025, the prior TCJA bonus depreciation schedules will be applicable to the project, resulting in only 40% bonus depreciation on the project.

If facing this situation, one potential strategy to consider is componentizing the project contracts and costs. In doing so, it may be possible to identify independent components of the project that were contracted after January 20, 2025, and are therefore eligible to shift into 100% bonus depreciation even if the larger, primary project contract costs are deemed ineligible. This approach requires a careful cost segregation study and invoice review. For example, if appliances for a newly constructed hotel were contracted separately from the general building construction contract, and were contracted and acquired after January 20, 2025, those assets may be 100% bonus eligible even if the building itself is not.

Qualified Production Property Presents Opportunity for Additional Bonus

Qualified Production Property, which is a new, bonus-eligible asset classification within OBBBA, provides a unique opportunity to utilize 100% bonus on certain original-use buildings and structural components involved in domestic manufacturing. Components such as foundations, walls, and roofing, which are traditionally depreciated over 39 years, can now be fully deducted in the first year.

Taking advantage of QPP, however, is not as straightforward as it may seem. While it may be tempting to take 100% bonus depreciation on the entirety of the investment, areas within the production facility that are not directly associated with production, such as offices, administration, sales, and research, are excluded. The work associated with these portions of the project must be carved out separately. An engineering-based cost segregation analysis could provide a bifurcation of the qualifying and non-qualifying portions of the project, allowing a taxpayer to correctly categorize assets while still maximizing the bonus depreciation benefits.

Construction on QPP assets must begin after January 20, 2025, and before 2030, with placement into service required by 2032. Projects started before 2025 are unlikely to qualify due to written binding contract rules. As a new asset classification, additional regulations and guidance could be issued in the near future as well.

While QPP offers immense potential for tax savings, navigating its intricacies requires strategic planning and precise documentation.

Consider Interplay Between §163(j) Election and Bonus Depreciation

The §163(j) real property trade or business election allows taxpayers to opt out of business interest deduction limitations. However, this election comes with a trade-off: certain “real property” assets must be depreciated using the Alternative Depreciation System, which prohibits bonus depreciation. Most importantly, this restriction applies to Qualified Improvement Property, a special classification available to interior renovations which is otherwise eligible for 100% bonus depreciation. This means that RPTB electors must depreciate their QIP expenditures over 20 years instead of immediately deducting them.

For businesses making substantial renovations or tenant improvements, losing the ability to claim bonus depreciation on QIP can be a significant drawback. However, alternative tax tools can help mitigate this limitation.

In many situations, the tangible property regulations provide a possible alternative vehicle for deductions. The regulations, first implemented in 2014, outline a series of tests to determine whether an expenditure is a capital improvement or a deductible repair. Expenditures that do not result in a material betterment, restoration, or adaptation of an existing property are considered repairs and, similar to 100% bonus deprecation, immediately deductible. The types of projects and expenditures that meet the QIP requirements are also typically strong candidates for a repairs study, meaning that RPTB electors, despite losing bonus on QIP, can still strategically maximize deductions on their interior investments.

Because RPTB electors are still able to take 100% bonus on their 5- and 7-year property, a cost segregation study also could serve as an alternative solution for maximizing deductions. Many components of a QIP project, such as cabinetry and finishes, are strong candidates for reclassification.

Ensure QIP Assets Are Properly Segregated

Even for taxpayers that are eligible for 100% bonus depreciation on QIP, implementation requires careful consideration. QIP is not a “catch-all” classification, and certain portions of renovation and remodel work, including work performed to the exterior of a building (such as rooftop HVAC units, roofing costs, and façade work), structural framework modifications, work that enlarges the building, and elevator/escalator work do not qualify. Incorrectly taking these assets as bonus eligible instead of depreciated over 27.5-39 years results in significant, easy-to-identify audit risk.

When facing these types of ineligible expenditures, TPR could again provide a strong alternative. Depending on the facts and circumstances of the work performed, exterior work, elevator/escalator work, and even structural framework modifications could qualify as an immediately deductible repair. For instance, roof membrane replacements, ineligible for bonus depreciation under QIP and depreciated over 27.5-39 years, typically qualify as immediately deductible repairs under TPR. The resulting net tax deduction is similar to what would have been achieved under 100% bonus depreciation but correctly categorized from a tax perspective.

Watch Out for Other Limiting Factors

Whenever ADS is required—whether due to an associated election, foreign-use property, or other specific circumstances—bonus depreciation is disallowed for all asset class lives. For real estate investment trusts, this extends to depreciation calculations made for earnings and profits purposes. Because E&P governs the amount of taxable income that must be distributed to shareholders to maintain favorable tax treatment, REITs must account for these depreciation limitations when planning their distributions and assessing their overall tax position.

Careful consideration must also be applied when acquiring property. While acquired, used property that is “new” to a taxpayer maintains the ability to utilize bonus depreciation under OBBBA, it is impermissible to take bonus depreciation on transactions between related parties. Additionally, if a taxpayer intends to implement bonus depreciation on an acquired property, they must make sure that the transaction is treated as an asset acquisition with a restarting of federal tax depreciation.

In all these cases, the alternative strategies discussed previously, like TPR or cost segregation studies, could help accelerate deductions.

What if 100% Bonus Is Not Best Option?

While 100% bonus depreciation delivers substantial first-year deductions, its long-term impact should be carefully considered. As a timing difference, bonus depreciation accelerates deductions upfront but often triggers depreciation recapture upon asset sale. Taxpayers should plan for this potential future liability, exploring strategies like §1031 exchanges or estate planning measures to mitigate recapture risks.

Perhaps a taxpayer finds themselves in a situation where it would be optimal to limit depreciation deductions to an amount less than what 100% bonus provides. In those situations, strategic elections could help a taxpayer achieve their goals. OBBBA provides taxpayers with an option to take a reduced 40% bonus in 2025 under TCJA rules, or even elect out of bonus depreciation entirely. Furthermore, annual elections out of bonus depreciation are made by class life (e.g., 5-, 7-, or 15-year property), giving taxpayers another strategic lever to align depreciation strategies with multi-year tax goals.

For example, perhaps 40% bonus on 5- and 7-year equipment gives a taxpayer the ideal current year deduction amount that they are looking for in 2025. That taxpayer could opt to follow the old TCJA bonus depreciation schedule, as well as elect out of bonus depreciation for 15-year property. This would enable them to take slower, multiyear strategic deductions on their 15-year property, as well as preserve some depreciable basis on their 5- and 7-year property for future years. Keep in mind that bonus elections are generally irrevocable for the tax year, so careful planning is essential.

Document Positions and Strategize for Future

The return of 100% bonus depreciation under OBBBA is an undeniably powerful tax planning tool. By understanding its limitations, timing rules, and interactions with other tax provisions, taxpayers can strategically incorporate bonus depreciation into their broader tax planning

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Benjamin Littell is a Director in the Valuation Advisory group at Stout.

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