Restored 100% bonus depreciation: IRS interim guidance helps clarify OBBBA rules

The rules for determining when property is ‘acquired’ are key.

The guidance largely adopts the framework of the existing regulations but replaces the key date of Sept. 27, 2017, with Jan. 19, 2025. This means property acquired pursuant to a written binding contract entered into before Jan. 20, 2025 will generally not be eligible for the new 100% rate and would remain subject to the TCJA phase-down.

Self-constructed property is similarly subject to the TCJA rules if construction, manufacturing or production began prior to Jan. 20, 2025.

The new law expands the definition of qualified property to include ‘qualified sound recording productions.’ To be eligible, a deduction for the production costs must have been allowable under section 181 (without regard to that section's cost limitations or termination date).

• A sound recording is treated as acquired on the date that principal recording commences.
• The property is considered placed in service at the time of its initial release or broadcast.
• This provision applies to productions commencing in taxable years ending after July 4, 2025.

The notice provides guidance on making elections related to bonus depreciation for property subject to the new rules.

• Taxpayers may still elect out of bonus depreciation entirely for any class of property.
• The new law allows taxpayers to elect a reduced bonus rate in lieu of 100% for the applicable year. In the first taxable year ending after Jan. 19, 2025, a taxpayer can elect to claim 40% bonus depreciation (60% for long-production-period property and certain aircraft) instead of the full 100%. This replaces the prior 50% election under the TCJA.
• Taxpayers may elect to treat components of larger self-constructed property as acquired separately from the larger self-constructed property, meaning some components may qualify for 100% bonus despite the larger property failing to qualify. There is little guidance on this process. The regulations do not specify what a component is or at what level of property to apply the rules. Taxpayers should proceed cautiously if making this election.

The IRS has stated that taxpayers may rely on this interim guidance for property placed in service before final regulations are issued. However, to do so, a taxpayer must apply all the rules in the notice consistently for all eligible property.

In recent years, bonus depreciation had been on a steady phase-down trajectory under the TCJA, dropping to 60% in 2024 and scheduled to fall further to 40% in 2025, forcing many businesses to either accelerate purchases to capture a higher rate or accept less favorable recovery timing. By allowing for the full and immediate expensing of qualifying assets, this change can substantially improve cash flow and lower the after-tax cost of acquiring equipment, machinery and other eligible property.

The timing of the change is critical and requires taxpayers to review the acquisition date rules in the bonus depreciation regulations. The restored 100% rate generally applies to property acquired after Jan. 19, 2025. As a result, property acquired under a written binding contract entered into before that date may remain subject to the prior phase-down rules. Taxpayers that modeled capital expenditures around declining bonus depreciation rates should revisit their investment plans.

With permanent 100% expensing, long-term capital planning becomes more predictable, and projects that were marginal under a 60% or 40% bonus depreciation environment may now present a stronger after-tax return. This increase certainly may also accelerate investments that were previously deferred due to the diminishing value of bonus depreciation.

The OBBBA also expands planning opportunities by making qualified sound recording productions eligible for bonus depreciation. For taxpayers in the music and entertainment industries, this is a notable development that aligns the treatment of certain creative production costs more closely with traditional bonus-eligible property and may incentivize increased investment in new audio content.

The OBBBA retains crucial flexibility. While 100% expensing is powerful, it may not be the optimal strategy for every business, particularly those with net operating losses to utilize or those concerned about the impact on state tax liabilities where state law does not conform to federal rules.

The guidance describes how a business may elect a lower bonus rate of 40% (or 60% for certain long-production-period property) in the first taxable year ending after Jan. 19, 2025. This election provides an essential off-ramp, allowing a company to tailor its depreciation deductions to its specific tax situation, ensuring that the benefit is maximized without creating unintended negative consequences.

In essence, this change provides a powerful default incentive and the flexibility to customize the approach. In turn, this empowers businesses to make more strategic, long-term investment decisions with greater tax certainty.