Federal Tax Incentives and Depreciation Reforms

The reinstatement of 100% bonus depreciation provides a permanent incentive for acquiring and placing property in service after January 19, 2025. Property is treated as acquired when a written binding contract is executed. This measure encourages immediate capital investment by allowing full cost recovery in the first year.

The deduction limit is raised to $2.5 million with an investment ceiling of $4 million for tax years beginning after December 31, 2024. This adjustment supports small- and medium-sized businesses by increasing their capacity to deduct the cost of qualifying property.

Adjusted taxable income for purposes of the Section 163(j) limitation will be permanently calculated without depreciation, amortization, or depletion deductions. Moreover, any allowable interest is allocated first to capitalizable amounts. Business interest carryforwards are not subject to capitalization rules. Notably, capitalized interest on personal property requires refined cost segregation methodologies, unless the taxpayer has opted out under the real property trade/business exception.

Businesses may fully expense depreciable nonresidential real property used integrally in qualified production activities. This provision applies to:

• New construction begun between January 19, 2025, and January 1, 2029, and placed in service by January 1, 2031.
• Property acquired within the same window and not previously used for qualified production.

Eligibility hinges on demonstrating a substantial transformation of tangible personal property. Office, R&D, lodging, and administrative functions are excluded. The provision includes a 10-year recapture period for non-qualified use and applies only to MACRS property.

To determine when construction begins, one safe harbor is available—the 5% Safe Harbor Test—under which construction is considered to have begun if the taxpayer has incurred at least 5% of total eligible project costs and makes continuous progress toward completion.

Alternatively, the IRS recognizes the Physical Work of a Significant Nature Test as a facts and circumstances analysis, focusing on when tangible work begins, including off-site manufacturing. This test excludes preliminary activities such as planning or designing, securing financing, researching, clearing or grading land, demolishing existing structures, obtaining permits, surveying, and similar preparatory work. Both standards require continuous efforts and are informed by guidance from Notices 2013-29 and 2018-59.

The act repeals the five-year MACRS classification for newly constructed solar and certain other energy property beginning construction after December 31, 2024. This change removes the accelerated depreciation benefit for these assets.

Section 48E credits will phase out for wind and solar property that begins construction after July 4, 2026, or is placed in service after December 31, 2027. Facilities receiving support from prohibited foreign entities after 2025 are disqualified.

Additionally, a recent Executive Order may influence the “beginning of construction” analysis. Although not yet codified in formal guidance, the order suggests that a substantial portion of a facility may need to be completed by the applicable deadline to qualify. This could indicate future changes to eligibility thresholds and documentation requirements for clean energy projects, but its exact impact remains uncertain pending regulatory interpretation.

Opportunity Zones (OZs) are made a permanent feature of the Internal Revenue Code, with mandatory decennial redeterminations to reevaluate qualifying low-income census tracts. This structural permanence enhances predictability for long-term investors while allowing for geographic updates based on evolving economic conditions.

Key enhancements include:

• 5-year holding period: Investors receive a 10% step-up in basis on the originally deferred capital gain if they hold their Qualified Opportunity Fund (QOF) investment for at least five years. This increases to 30% if the investment is made in a Qualified Rural Opportunity Fund (QROF).
• 10-year holding period: Investors may permanently exclude any post-investment appreciation by stepping up their basis to fair market value upon sale or exchange after a 10-year holding period.
• 30-year limitation: For investments held longer than 30 years, the basis step-up is capped at the fair market value as of the 30th anniversary.

Additionally, the taxation of the originally deferred gain is clarified. The deferred gain must be recognized in the earlier of (1) the year the QOF investment is sold or exchanged, or (2) the fifth anniversary of the investment date. The amount of recognized gain is the lesser of the original deferred gain or the fair market value of the investment, reduced by the investor’s adjusted basis.

The provision also modifies the substantial improvement test. Generally, QOZ business property must be substantially improved within 30 months by more than 100% of its adjusted basis. However, in cases where the property is located entirely within a rural zone, the improvement requirement is reduced to 50%. This rural exception becomes effective July 4, 2025.

The new Opportunity Zone rules are generally effective for investments made after December 31, 2026.

179D Deduction (Sec. 70507) is terminated for construction starting after June 30, 2026. However, the deduction remains available to building owners that placed qualifying buildings into service in prior taxable years, provided they file an automatic accounting method change request (Form 3115) to claim the deduction retroactively.

45L New Home Credit (Sec. 70508) ends for homes acquired after June 30, 2026.

The legislation introduces two major enhancements to the Low-Income Housing Tax Credit (LIHTC) program. First, the annual state housing credit ceiling is permanently increased by 12% for calendar years beginning after 2025. This expansion boosts the overall allocation of credits available to states, allowing for more affordable housing projects to be financed annually.

Second, the Act lowers the tax-exempt bond financing threshold from 50% to 25% of the aggregate basis of the building and land. This significant modification applies if the issue date of one or more such obligations is after December 31, 2025 and at least 5% of the aggregate basis is financed by those obligations. This change substantially increases the availability of LIHTCs by enabling more projects to qualify with less reliance on volume cap bonds.

Taken together, these enhancements are designed to improve the financial feasibility and scalability of LIHTC developments, especially in markets constrained by volume cap limitations. These changes broaden the feasibility of LIHTC financing.

NMTC is made permanent, with a $5 billion annual allocation. This supports continued investment in economically distressed communities.

Stakeholders should assess implications for their portfolios and prepare to adjust accounting practices, particularly with regard to cost segregation, interest capitalization, and asset classification. Additional regulatory guidance is anticipated.

For assistance in applying these provisions, or for questions about how the changes may impact your organization, please contact Scarpello Consulting to speak with a tax specialist experienced in navigating these complex provisions.