Bonus depreciation is a first-year write-off for the cost of eligible property that’s used instead of depreciating the cost over a number of years. The One Big Beautiful Bill Act made changes to bonus depreciation for equipment and introduced bonus depreciation for certain realty. In many ways these two types of bonus depreciation are similar, but there are also differences.
Bonus depreciation for equipment and machinery
The rate for bonus depreciation is permanently 100% of cost for qualified property acquired and placed in service, and specified plants planted or grafted, after January 19, 2025. From January 1, 2025, through January 19, 2025, the rate was 40%.
Proposed regulations are coming, but until then the IRS posted some guidance on applying the 100% rate.
- Transition rule. Under a transition rule, the 40% rate can be chosen for the first tax year ending after January 19, 2025 (i.e., for 2025 for calendar year businesses), which is an option that may make sense, say, for a corporation using a net operating loss.
- Acquisition date. “Acquired” generally means having a binding written contract, although there’s a special rule for self-constructed property.
- For film, TV, live production and sound recording productions, the key date is when the action gets going. For instance, this is when all necessary elements for producing a live theatrical production are secured. For sound recording production, it’s the time of the initial release or broadcast.
- For plants, it is when they are planted or grafted.
- Sound recording productions. The definition of qualified property has been expanded to include sound recording productions commencing in tax year ending after July 4, 2025 (e.g., the costs of a calendar year business that started production in May 2025 would qualify).
Note: This bonus depreciation is automatic unless you elect not to use it. An election out of bonus depreciation is made by filing a statement with Form 4562 by the due date (including extensions) for the return for the year the property is placed in service. This election is made at the entity level (e.g., by a partnership or S corporation).
Bonus depreciation for realty
Bonus depreciation can be claimed for “qualified production property.” This is nonresidential real property in the U.S. where the business uses it to perform an integral part of a qualified production activity—manufacturing, chemical production, agricultural production, or refining activity. Usually, the property’s basis must be allocated between qualified and nonqualified uses, and any reasonable method can be used to make the allocation, but there’s a de minimis rule: if at least 95% is qualified use, then no allocation is required.
The write-off is 100% of the cost of building or the cost of substantially transforming a building for a qualified production activity that’s placed in service after July 5, 2025, and before January 1, 2031. There’s no dollar limit.
Proposed regulations are also coming for this write-off, but until then there is some IRS guidance that clarifies a number of the rules so business can get started with qualified production activity projects.
- New buildings that are leased. A business cannot use the qualified production activity of another taxpayer if the first leases the newly built factory to the second. But there are two exceptions: (1) for consolidated groups and (2) for contract manufacturing (i.e., the business doesn’t have to be the owner of the products produced in the qualified production activity).
- Existing buildings. You don’t have to start construction from the ground up to qualify for bonus depreciation. It can be used for an existing building that is acquired and placed in service within the time constraints mentioned earlier, provided that the property was not used a qualified production activity by anyone between January 1, 2021, and May 12, 2025, you didn’t use the property before acquiring it, and the building then becomes an integral part of a qualified production activity.
- Property used to store raw materials and finished products. The receiving and storage of raw materials for a qualified production activity are treated as “essential” activities if they are conducted in, or take place within, the same property, or within the same integrated facility as the qualified production activity. But the storage of finished products is not essential to a qualified production activity.
- Recapture. If a building ceases to have a qualified production activity for less than 10 years after it’s placed in service, there’s recapture of the tax benefit. But there’s no recapture if there’s a change in the type of qualified production activity.
Note: This write-off it not automatic; it must be elected. The election is made by attaching a statement to a timely filed original tax return. Again, the election is made at the entity level.
Final thought
Companies, along with their business and tax advisers, will need to think long and hard about these tax breaks. Is it time to buy new equipment given the cost savings from the tax deduction? Will bonus depreciation influence decisions about whether to buy or lease? Should the breaks not be used because of their impact on other tax provisions? While taxes should never be the sole factor in business decisions, it can be an important one.
Additional blogs about bonus depreciation can be found in this list here.
