19.2 2025 Bifurcated Bonus Depreciation: Pre-Jan 20 (40%) vs. Post-Jan 19 (100% OBBBA)

Legislative Framework & The 2025 Bifurcated Bonus Rules

Under IRC §168(k), taxpayers are allowed an additional first-year depreciation deduction—commonly referred to as bonus depreciation—for qualified property placed in service during the taxable year. Unlike standard MACRS depreciation which spreads cost recovery over multiple years, bonus depreciation accelerates basis recovery into Year 1.

The TCJA Phase-Down vs. OBBBA Permanent Restoration

Under the Tax Cuts and Jobs Act of 2017 (TCJA), 100% bonus depreciation was scheduled to phase down by 20 percentage points each calendar year:

• 2022: 100%
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and thereafter: 0%

However, on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted into law. OBBBA permanently restored 100% bonus depreciation, but enacted a specific statutory effective date tied to the date of acquisition.

Tax Year 2025 Bifurcated Bonus Depreciation Framework:
  ┌──────────────────────────────────────────┬──────────────────────────────────────────┐
  │          Pre-January 20, 2025            │           Post-January 19, 2025          │
  ├──────────────────────────────────────────┼──────────────────────────────────────────┤
  │ Property Acquired BEFORE January 20, 2025│ Property Acquired AND Placed in Service  │
  │ and placed in service during 2025:       │ AFTER January 19, 2025:                  │
  │                                          │                                          │
  │ Rate = 40% Bonus Depreciation            │ Rate = 100% Bonus Depreciation           │
  │ (TCJA Phase-Down Rate)                   │ (OBBBA Permanent Restoration)            │
  └──────────────────────────────────────────┴──────────────────────────────────────────┘

The Special 40% Transition Election

For the first taxable year ending after January 19, 2025 (which is calendar year 2025 for calendar-year taxpayers), OBBBA provides a special statutory transition election:

• A taxpayer may affirmatively elect to apply a 40% rate (or 60% for property with longer production periods and certain aircraft) instead of 100% bonus depreciation to property acquired and placed in service after January 19, 2025.
• Why make this election? A business with expiring tax credits (such as research credits under §41 or general business credits under §38), or a business subject to Section 163(j) interest limitations, may prefer smaller current depreciation deductions to avoid creating unabsorbed net operating losses or wasting non-refundable credits.

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Qualifying Property Under IRC §168(k)(2)

To qualify for bonus depreciation, property must satisfy the statutory definition of qualified property under IRC §168(k)(2):

1. MACRS Property with Recovery Period ≤ 20 Years: All personal property depreciated under MACRS with a recovery period of 20 years or less. This covers:
   • 3-year property (specialized tools, racehorses);
   • 5-year property (automobiles, light trucks, computers, peripheral equipment, office machinery);
   • 7-year property (office furniture, fixtures, agricultural machinery, manufacturing equipment);
   • 10-year property (barges, tugs, vessels);
   • 15-year property (land improvements such as sidewalks, fences, shrubbery, drainage facilities);
   • 20-year property (farm buildings, railroad tracks).
2. Qualified Improvement Property (QIP): Interior improvements to nonresidential real property placed in service after the building was first placed in service (excluding elevators, escalators, structural framework, and building enlargement). QIP is statutorily classified as 15-year MACRS property (straight-line recovery), making it fully eligible for bonus depreciation!
3. Water Utility Property: 25-year property defined under IRC §168(e)(5).
4. Off-the-Shelf Computer Software: Depreciated under IRC §167(f)(1) over 36 months.
5. IRC §168(n) Qualified Production Property (OBBBA Addition): A permanent provision enacted under OBBBA allowing 100% bonus depreciation for new domestic manufacturing real property (placed in service after July 4, 2025, and before January 1, 2031). Non-manufacturing commercial real estate (39-year) and residential rental real estate (27.5-year) continue to be strictly ineligible for bonus depreciation.

New vs. Used Property Standards

Prior to the TCJA, bonus depreciation was restricted strictly to original-use ("new") property. Under current law and preserved under OBBBA, both new and used property qualify for bonus depreciation, provided used property meets three strict conditions:

1. The property was not used by the taxpayer (or a predecessor) at any time prior to acquisition;
2. The property was not acquired from a related person (under IRC §267 or §707(b)); and
3. The property's basis is not determined in whole or in part by reference to the adjusted basis of the property in the hands of the transferor (no gifts, inheritances, or §351/§721 tax-free contributions).

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Strategic Comparison: Section 179 Expensing vs. Bonus Depreciation

Understanding the differences between IRC §179 and IRC §168(k) is one of the most heavily tested areas on the Special Enrollment Examination:

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Mandatory Calculation Ordering Rules

When a business acquires depreciable property and chooses to utilize multiple tax recovery provisions, the Internal Revenue Code prescribes a strict, non-negotiable calculation ordering sequence:

Step-by-Step Depreciation Ordering Sequence:
  Total Asset Unadjusted Cost Basis
    │
    ├─ Step 1: Subtract Section 179 Expense Deduction (elected amount)
    │          Adjusted Basis = Cost - §179 Deduction
    │
    ├─ Step 2: Subtract Bonus Depreciation (§168(k))
    │          Bonus Deduction = Adjusted Basis x Applicable % (40% or 100%)
    │          Remaining Basis = Adjusted Basis - Bonus Deduction
    │
    └─ Step 3: Compute Regular MACRS Depreciation
               MACRS Deduction = Remaining Basis x MACRS Table Percentage (Year 1 convention)
               Final Tax Basis = Remaining Basis - MACRS Deduction

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Election Out Mechanics & The Floor Plan Penalty

1. Electing Out of Bonus Depreciation (IRC §168(k)(7))

Bonus depreciation is mandatory for all qualified property unless the taxpayer affirmatively makes an election out:

• Class-by-Class Basis: The election out must be made with respect to all property in the same property class placed in service during the taxable year. For example, a taxpayer can elect out of bonus depreciation for all 5-year property while claiming bonus depreciation on all 7-year and 15-year property.
• Timing: The election must be made on Form 4562 and attached to a timely filed original return (including extensions) for the year the property was placed in service.
• Irrevocable: Once made, the election out cannot be revoked without IRS consent.

2. Floor Plan Financing Disallowance (IRC §168(k)(9)(B))

Motor vehicle dealerships often incur massive floor plan financing interest to finance vehicle inventory:

• Under IRC §163(j)(1)(C), floor plan financing interest is fully deductible in addition to the standard 30% of Adjusted Taxable Income (ATI) limitation.
• The Penalty: Under IRC §168(k)(9)(B), if a business benefits from floor plan financing interest to deduct business interest expense in excess of 30% of ATI, the business is statutorily barred from claiming bonus depreciation on ANY property placed in service during that tax year! An auto dealership that relies on floor plan interest relief cannot claim bonus depreciation on new shop lifts, computers, or showroom renovations.

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Comprehensive Worked Numerical Example: Coordinating §179, Bifurcated Bonus & MACRS

Titan Manufacturing Corp, a calendar-year C corporation, placed in service the following new equipment during Tax Year 2025. Titan reports active business taxable income of $5,000,000 before depreciation:

Acquisitions in 2025:
  Asset A (5-year MACRS, Specialized Lathe):  Acquired Jan 12, 2025; Placed in service Mar 1, 2025.
    - Unadjusted Cost Basis:                                     \$1,000,000
    - Qualification: Acquired PRE-Jan 20, 2025 -> 40% Bonus Depreciation Rate.

  Asset B (7-year MACRS, Stamping Press):    Acquired Feb 18, 2025; Placed in service Jun 1, 2025.
    - Unadjusted Cost Basis:                                     \$3,200,000
    - Qualification: Acquired POST-Jan 19, 2025 -> 100% Bonus Depreciation Rate.

Total 2025 Purchases: \$1,000,000 + \$3,200,000 = \$4,200,000.
Phase-Out Reduction (§179): \$4,200,000 - \$4,000,000 = \$200,000.
Allowable Section 179 Cap: \$2,500,000 - \$200,000 = \$2,300,000.
Titan elects to allocate its full \$2,300,000 Section 179 deduction to Asset B (stamping press).

Step 1: Depreciation Calculation for Asset A (\$1,000,000 Cost - 5-Year Property)
  - Section 179 elected on Asset A:                              \$0
  - Adjusted Basis for Bonus Depreciation:                       \$1,000,000
  - Bonus Depreciation (Pre-Jan 20 -> 40%): \$1,000,000 x 40%     \$400,000
  - Remaining Depreciable Basis: \$1,000,000 - \$400,000         \$600,000
  - Regular MACRS (5-year, half-year convention, 20.00%):        
    \$600,000 x 20.00%                                          \$120,000
  Total 2025 Deduction for Asset A (\$400,000 + \$120,000):        \$520,000
  Year-End Adjusted Tax Basis of Asset A:                        \$480,000

Step 2: Depreciation Calculation for Asset B (\$3,200,000 Cost - 7-Year Property)
  - Section 179 elected on Asset B:                              \$2,300,000
  - Adjusted Basis for Bonus Depreciation: \$3,200,000 - \$2.3M   \$900,000
  - Bonus Depreciation (Post-Jan 19 -> 100%): \$900,000 x 100%    \$900,000
  - Remaining Depreciable Basis for MACRS:                       \$0
  - Regular MACRS Depreciation:                                  \$0
  Total 2025 Deduction for Asset B (\$2,300,000 + \$900,000):      \$3,200,000
  Year-End Adjusted Tax Basis of Asset B:                        \$0

Summary of Total 2025 Cost Recovery:
  - Total Section 179 Deduction:                                 \$2,300,000
  - Total Bonus Depreciation Deduction (\$400,000 + \$900,000):   \$1,300,000
  - Total Regular MACRS Depreciation:                            \$120,000
  Total First-Year Write-Off Across Both Assets:                 \$3,720,000