OBBB Changes to Bonus Depreciation

Bonus depreciation is a tax incentive under IRC § 168(k) that allows businesses to immediately deduct a percentage of the cost of qualified property in the year it is placed in service, rather than depreciating the cost over the asset’s normal recovery period. The 2017 Tax Cuts and Jobs Act phased down the applicable bonus depreciation percentage beginning in 2023, with full phase-out scheduled for 2027 for most property. The bonus depreciation rate for 2025 pre-OBBB was just 40%. The OBBB, however, permanently reinstated 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. It also provided transition provisions.

Specifically, under transition provisions, taxpayers may elect to apply the 40% rate (or 60% for certain long-production-period property and aircraft) for property placed in service during their first tax year ending after January 19, 2025, instead of the 100% rate. This election must be made on a timely filed return. Taxpayers may also elect out of bonus depreciation for any class of property for the tax year. This election applies to all property in the same class placed in service during that year.

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