Alert

The budget reconciliation package PL 119-21, commonly referred to as the One Big Beautiful Bill Act (OBBBA) was signed into law by President Donald Trump on July 4, 2025.

Among its many provisions, the OBBBA reinstates 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This legislative development represents a significant reversal of the scheduled phase-down enacted under the Tax Cuts and Jobs Act of 2017 and carries important implications for capital investment planning.

To properly evaluate the scope of the reinstatement, it’s essential to situate the OBBBA within the broader legislative history of bonus depreciation and to revisit the general principles governing acquisition dates, including considerations for binding contracts and when construction begins.

Legislative Background

Bonus depreciation was first introduced in 2002, providing an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property.

Originally conceived as a temporary economic stimulus measure in the aftermath of the 2001 recession and the September 11, 2001, attacks, the provision was designed to encourage immediate capital investment, expedite the replacement of existing equipment, and enhance liquidity for businesses.

Over the past two decades, Congress has repeatedly modified bonus depreciation, altering applicable percentages, extending eligibility windows, and tailoring placed-in-service deadlines for particular asset classes such as long-production-period and transportation property.

Although intended at times as temporary stimulus, bonus depreciation has become a recurring feature of federal tax policy. The following table summarizes the statutory framework since its inception.

Bonus Depreciation Timeline

General Rules for Consistent Application

While statutory rates and eligibility periods have fluctuated, several core principles have consistently applied over the years:

Property eligible for bonus depreciation has generally included:

• Depreciable property with a recovery period of 20 years or less
• Certain computer software
• Water utility property
• Qualified film, television, and live theatrical productions
• Specified plants

Exclusions apply to:

• Property with less than 50% business use
• Property for which the taxpayer elects out of bonus depreciation
• Property subject to the Alternative Depreciation System (ADS), such as tax-exempt use property or property used predominantly outside the United States

Historically, bonus depreciation was confined to new property where the original use began with the taxpayer. The Tax Cuts and Jobs Act of 2017, however, expanded eligibility to used property, provided it was acquired in an arm’s-length transaction and had not previously been used by the taxpayer.

Acquired Property

Determining the acquisition date is pivotal in applying the correct bonus depreciation rate.

For property not acquired under a written binding contract, the acquisition date is the date a taxpayer paid (cash basis) or incurred (accrual basis) more than 10% of the property’s total cost, excluding land and preliminary activities such as planning, design, or financing.

For property acquired under a written binding contract, the acquisition date is the later of:

• The date the contract was entered into
• The date the contract became enforceable under state law
• The date all cancellation periods lapsed
• The date all contingencies were satisfied

A contract is binding only if enforceable under state law and does not limit damages to a specified amount. A damages cap below 5% of the total contract price, alone, is not considered a binding contract. 

Self-Constructed Property

For self-constructed—manufactured, produced or constructed—property, the acquisition date is deemed to be the point at which a taxpayer begins manufacturing, constructing, or producing the property.

The regulations provide two approaches for determining when this beginning occurs.

First, a taxpayer may rely on the facts-and-circumstances test, under which construction is considered to have commenced when physical work of a significant nature begins. Activities such as site clearing, test drilling, or securing design and permitting approvals do not rise to the level of significant physical work. By contrast, activities such as pouring concrete foundations and footings or installing site utilities (e.g., storm, water, and sewer systems) are considered substantive and mark the commencement of construction.  

Alternatively, a taxpayer may elect to apply the safe harbor rule. Under this approach, construction is treated as having begun when the taxpayer has incurred (for an accrual-basis taxpayer) or paid (for a cash-basis taxpayer) at least 10% of the total cost of the property. Importantly, this calculation excludes the cost of land as well as preliminary activities such as planning, design, and financing.

OBBBA and Planning Implications

The OBBBA reinstates 100% bonus depreciation for property acquired and placed in service after January 19, 2025. Although the Department of the Treasury has not yet issued regulations under Section 168(k) as amended, the well-established acquisition-date rules above from prior law and regulatory guidance can reasonably be expected to continue to govern the application of the provision.

In practice, this reinstatement creates a transitional environment in which the timing of acquisition is determinative.

Property deemed acquired prior to January 20, 2025, based on prior regulatory guidance, would remain subject to the Tax Cuts and Jobs Act phase-down, which provides a 40% bonus depreciation rate for 2025 and 20% for 2026. Examples and considerations follow.

Real Estate Acquisitions

If a purchase agreement is executed in December 2024 but the closing does not occur until February 2025, the acquisition would generally fall under the 40% bonus depreciation rate—unless contingencies existed that delayed the contract’s enforceability.

Accordingly, purchase and sale agreements should be carefully reviewed to understand the operative terms, conditions, and the point at which the contract became binding.

Newly Constructed Assets

For a newly developed apartment complex placed in service in June 2025, the applicable bonus depreciation rate may still be 40% if substantive construction activities began in early 2024.

Detailed documentation of original contract execution dates should be retained, as well as progress-based billings from contractors and vendors, to substantiate when construction commenced for purposes of evaluating eligibility.

Purchased Equipment

Manufacturing, food, beverage, and other businesses where significant equipment is often ordered months before being placed in service must give particular attention to purchase documentation and timing when determining the proper cutoff for 2025 capital expenditures.

For example, a dairy processing company that orders conveyor systems throughout the year, with an average 90-day lead time from order to installation, would need to analyze whether equipment installed and placed in service on March 15, 2025, qualifies for the reduced 40% bonus depreciation rate.

Custom Manufactured Equipment

On December 15, 2024, Company AA, an accrual-basis taxpayer, entered into a written binding contract with Company BB to manufacture a customized piece of equipment for use in AA’s trade or business.

BB began manufacturing the equipment on February 1, 2025. The completed equipment was delivered to AA on June 15, 2025, at which time AA incurred the total cost. AA placed the equipment in service on July 1, 2025.

Because AA is treated as the manufacturer of the equipment and manufacturing began in February 2025, the acquisition date is February 1, 2025, and the applicable bonus depreciation percentage is determined by reference to that date, provided all other requirements are satisfied.

Taxpayers should be aware that acquisition dates can directly impact which bonus depreciation rate applies to their assets. To apply the correct rate we recommend maintaining original purchase and sale agreements and other binding contracts whenever possible. For self-constructed assets, it’s equally important to review and retain records that show when construction costs were first incurred or when significant physical work began.

Careful documentation of these dates will allow for accurate application of the bonus depreciation rules and help avoid missed opportunities or compliance issues.

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