Bonus Depreciation Amendment

Taxpayers with real estate assets can now use cost segregation to identify qualifying assets eligible for 100% bonus depreciation.

Sec. 70301 of the One Big Beautiful Bill Act (OBBBA) permanently reinstated 100% bonus depreciation for property acquired after January 19, 2025. Per OBBBA, property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition.

The Treasury has not yet issued guidance regarding the acquisition requirement, but in the interim, taxpayers should look to Treas. Reg. §1.168(k)-2(b)(5) & 2(c), for the rules previously issued to implement the Tax Cut & Jobs Act’s (TCJA) extension of bonus depreciation using substantially similar language to the OBBBA. Note: all references to the TCJA’s relevant acquisition date of September 27, 2017, have been changed to January 19, 2025, for purposes of this discussion.

Under the regulation, depreciable property will meet the acquisition requirement if the property is acquired by the taxpayer after [January 19, 2025], or is acquired by the taxpayer pursuant to a written binding contract entered into by the taxpayer after [January 19, 2025]. Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income is not acquired pursuant to a written binding contract but is considered to be self-constructed property.

The acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of –

• The date on which the contract was entered into;
• The date on which the contract is enforceable under State law;
• If the contract has one or more cancellation periods, the date on which all cancellation periods end (a cancellation period is the number of days stated in the contract for any party to cancel the contract without penalty); or
• If the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied (a contingency clause is one that provides for a condition (or conditions) or action (or actions) that is within the control of any party or a predecessor).

A contract is binding only if it is enforceable under State law against the taxpayer or a predecessor, and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, any contractual provision that limits damages to an amount equal to at least 5% of the total contract price will not be treated as limiting damages to a specified amount. If a contract has multiple provisions that limit damages, only the provision with the highest damages is taken into account in determining whether the contract limits damages. Also, in determining whether a contract limits damages, the fact that there may be little or no damages because the contract price does not significantly differ from fair market value will not be taken into account.

For self-constructed property, if a taxpayer manufactures, constructs, or produces property for use by the taxpayer in its trade or business or for its production of income, the acquisition rules are treated as met for the property if the taxpayer begins manufacturing, constructing, or producing the property after [January 19, 2025]. If a taxpayer enters into a written binding contract before [January 20, 2025], with another person to manufacture, construct, or produce property and the manufacture, construction, or production of this property begins after [January 19, 2025], the acquisition rules are met.

The manufacture, construction, or production of property begins when physical work of a significant nature begins. Physical work does not include preliminary activities such as planning or designing, securing financing, exploring, or researching. The determination of when physical work of a significant nature begins depends on the facts and circumstances.

Fortunately, a safe harbor is provided. Physical work of a significant nature will be considered to begin at the time the taxpayer incurs (in the case of an accrual basis taxpayer) or pays (in the case of a cash basis taxpayer) more than 10% of the total cost of the property, excluding the cost of any land and preliminary activities such as planning or designing, securing financing, exploring, or researching. When property is manufactured, constructed, or produced for the taxpayer by another person, this safe harbor test must be satisfied by the taxpayer.

If a binding contract to acquire a component does not satisfy these requirements, the component does not qualify for the additional first year depreciation deduction. However, a binding contract to acquire one or more components of a larger self-constructed property will not preclude the larger self-constructed property from satisfying the acquisition rules. Accordingly, the unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not satisfy the acquisition requirements.

If the manufacture, construction, or production of the larger self-constructed property begins before [January 20, 2025], the larger self-constructed property and any acquired components related to the larger self-constructed property do not qualify for the additional first year depreciation deduction under this section, except as provided in the election under 1.168(k)-2(c).

The acquisition date of property that the taxpayer acquires pursuant to a contract that does not meet the definition of a written binding contract is the date on which the taxpayer paid, in the case of a cash basis taxpayer, or incurred, in the case of an accrual basis taxpayer, more than 10 percent of the total cost of the property, excluding the cost of any land and preliminary activities such as planning and designing, securing financing, exploring, or researching. The preceding sentence also applies to property that is manufactured, constructed, or produced for the taxpayer by another person under a written contract that does not meet the definition of a binding contract and that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business or for its production of income.

Election Under §1.168(k)-2(c): This provision allows a taxpayer to elect to claim 100% bonus depreciation for certain components of a larger self-constructed property even if the overall property is not eligible for bonus depreciation due to having begun construction before [January 20, 2025].

1. Eligibility to Elect
   • Taxpayers may elect to treat acquired or self-constructed components as eligible for bonus depreciation if:
     • The component qualifies under §168(k);
     • The component is placed in service as part of a larger self-constructed property; and
     • The component (not the larger property) was acquired or began construction after [January 19, 2025].
2. Definition of Larger Self-Constructed Property
   • Must be constructed by or for the taxpayer for use in a trade or business or production of income;
   • Must begin construction before [January 20, 2025];
   • Only includes property described in §1.168(k)-2(b)(2)(i)(A)–(D);
     • Ex. MACRS property w/recovery period of 20 yrs. or less; Qualified Improvement Property
   • Excludes property for which an election out of bonus depreciation has been made under §168(k)(7).
3. Definition of Components
   • A component must meet all requirements under §168(k); and
   • Must be acquired or begin construction after [January 19, 2025].
   • Can be acquired by purchase or self-constructed.
4. Installation Costs
   • Installation costs are eligible for bonus depreciation if tied to an eligible component.
5. Computation
   • Bonus depreciation is computed on the component basis (portion of cost attributable to eligible components).
   • Remaining basis is depreciated under old §168(k) rules.
6. Making the Election
   • Must be made by the due date (including extensions) of the return for the year the larger property is placed in service.
   • Election is made via statement attached to the return.
   • Election can apply to some or all eligible components.
7. Revocation (§(c)(7))
   • Generally, requires a private letter ruling from the IRS.
   • Exception: An automatic 6-month extension is granted to revoke if done via amended return within that period.