What Is Bonus Depreciation?
Bonus depreciation is a tax incentive that allows businesses to immediately deduct a significant portion of the purchase price of eligible assets rather than depreciating them over time. First introduced in 2002 to encourage business investment, bonus depreciation has remained a valuable tax planning strategy for companies seeking to accelerate deductions and strengthen cash flow.
Traditionally, bonus depreciation is applied to assets under modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less, including personal property, land improvements, and qualified improvement property (QIP). Doing so enables businesses to accelerate deductions by writing off a percentage of eligible costs in the year that the assets are placed in service.
Past: Where It All Began
Bonus depreciation has evolved significantly since its introduction in the Job Creation and Worker Assistance Act of 2002. Below is a brief timeline of legislative guidance since its inception:
- 2002–2010: Bonus depreciation was initially offered at a lower percentage, generally 50% of the asset’s cost basis.
- 2010–2011: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily allowed 100% bonus depreciation for property placed in service between September 8, 2010 and December 31, 2011, subject to binding contract rules.
- 2012 onward: The rate reverted to 50%.
- 2017–2022: The Tax Cuts and Jobs Act (TCJA) reinstated 100% bonus depreciation for qualified property placed in service after September 27, 2017, through December 31, 2022, and allowed acquired property to become eligible for bonus depreciation during this period.
- Phase-down under TCJA: The reduction in bonus depreciation began in 2023 and continued until its scheduled elimination in 2027.
| Bonus Depreciation Rates | |||
|---|---|---|---|
| Binding Contract in Place prior to September 28, 2017 | Binding Contract after September 27, 2017 | ||
| 50% | ||
| 50% |
| 100% |
| 40% |
| 80% |
| 30% |
| 60% |
| None |
| 40% |
| 20% | ||
*0% for purchases PIS through 9/27/17, 50% for new construction and renovations PIS through 9/27/17 | |||
OB3: A Game Changer
The One Big Beautiful Bill Act (OB3) permanently restores 100% bonus depreciation for most eligible property placed in service after January 19, 2025. This is a significant shift from the prior phase-down schedule under the TCJA, which reduced bonus depreciation from 100% in 2022, 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, with complete elimination after 2026.
Current Rules in Relation to the OB3
Under the OB3, taxpayers may elect to apply prior rules for 40% or 60% bonus depreciation, instead of 100% during the transition year under IRS Notice 2026-11. The timing of entering a binding contract is important for determining which bonus rule applies.
Binding Contracts
IRS regulations define a binding contract as:
- Legally enforceable under state law.
- Includes a cancellation penalty of at least 5% of the total contract price and meets IRS criteria to qualify.
- If the cancellation penalty is less than 5%, the IRS does not consider the contract binding for bonus depreciation purposes.
- Specific in property, scope, and terms.
- Signed by all parties (not an option or letter of intent).
Contracts signed before January 20, 2025, generally fall under the phase-down rules (40% in 2025, 20% in 2026). After that date, OB3 rules apply.
For purchased property, the acquisition date is generally:
- The date that the binding purchase agreement is executed, provided it meets the written binding contract criteria.
- If the contract is not binding, the acquisition date defaults to the closing date.
If the taxpayer is self-constructing the property, the acquisition date is determined by either:
- The date that physical work of a significant nature begins, or
- The date that the taxpayer incurs 10% or more of the total expected cost, meets the safe harbor ruling, and allows the taxpayer to use the component election.
Looking Ahead
While the OB3 makes 100% bonus depreciation permanent, history shows that tax legislation can change. Businesses should remain vigilant and consult with advisors regularly.
With the OB3 in place, tax planning strategies shift. For example:
- Cost segregation studies remain critical. Even with 100% bonus depreciation restored, identifying shorter-life assets helps to ensure that the enhanced benefit is available.
- Timing matters, especially for projects spanning the transition period. Contracts signed before January 20, 2025 or projects with 10% of costs incurred before that date may still fall under prior rules.
Bonus Depreciation Summary for Clients & Tax Professionals
- The OB3 restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025.
- Prior rules may remain. The TCJA phase-down is still relevant for certain property.
- Timing matters. Bonus rates depend on when a property is placed into service and when a binding contract is signed.
How Forvis Mazars Can Help
Our professionals at Forvis Mazars are ready to assist you in understanding and implementing this new guidance. We can help with cost segregation studies, timing strategies, and pairing with other tax incentives to enhance benefits. In addition, we offer the following services:
- Cost segregation studies to help accelerate depreciation and improve cash flow
- Navigating complex timing rules for acquisitions and newly constructed property
- Pairing cost segregation with other incentives, such as the Section 179D Energy-Efficient Commercial Buildings Deduction
- Identifying and properly classifying QIP so that bonus-eligible components are segregated and supported
- Isolating qualified production property (QPP) assets within a facility or project
- Strategic planning to help ensure compliance and increase tax benefits under the OB3
For more information, please reach out to a professional at Forvis Mazars. In addition, subscribe to our FORsights™ for more resources.