15.4 Bonus Depreciation
Key Takeaways
OBBBA restored 100% bonus depreciation PERMANENTLY for property acquired AND placed in service after January 19, 2025.
Tax Year 2025 is BIFURCATED: 40% for ordinary qualifying property acquired before January 20 and placed in service in 2025; 100% when both acquisition and placement follow January 19, absent a lower-rate election.
For the first tax year ending after January 19, 2025, taxpayers may elect 40% instead of 100% (60% for long-production-period property and certain aircraft). This differs from the class-by-class election out.
Applies to property with MACRS recovery ≤20 years (most equipment, QIP).
NEW: §168(n) Qualified Production Property — 100% bonus for new domestic manufacturing real property (placed in service after July 4, 2025 and before January 1, 2031).
Both new and used property qualify (subject to anti-churning rules); CAN create or increase an NOL.
2025 luxury auto §280F first-year cap: $20,200 with bonus, $12,200 without.
Why This Matters for the Exam
Bonus depreciation is the single largest depreciation change for the 2026-2027 testing window. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation for property acquired AND placed in service after January 19, 2025, overriding the TCJA phase-down schedule that would have set 2025 at 40%, 2026 at 20%, and 2027 at 0%.
Tax Year 2025 is bifurcated — the cutoff date and the election are heavily testable. Practice both the acquisition-date and placed-in-service-date tests.
Bonus Depreciation Rates — Bifurcated 2025
| Period | Rate |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| Acquired before Jan 20, 2025 and placed in service during 2025 (ordinary qualifying property) | 40% |
| Acquired AND placed in service after Jan 19, 2025 | 100% (OBBBA — PERMANENT) |
| 2026+ | 100% (PERMANENT under OBBBA) |
Critical: Both the acquisition (or binding contract) date AND the placed-in-service date must occur after January 19, 2025 to qualify for 100%. If property was acquired before Jan 20, 2025 but placed in service later, it stays at 40%.
Lower-Rate Election and Election Out
For the first tax year ending after January 19, 2025, Section 168(k)(10) permits an election to use 40% instead of 100% for the affected qualifying property, or 60% for specified long-production-period property and aircraft. A calendar-year taxpayer's first such year is 2025. Do not describe this transitional lower-rate election as the ordinary class-by-class election out.
Section 168(k)(7) separately permits electing out of bonus for an entire class of property placed in service that year. Choosing no bonus for all 5-year property while retaining bonus for 7-year property uses the election out. It is not an asset-by-asset choice.
NEW — §168(n) Qualified Production Property (QPP)
OBBBA created an entirely new category of bonus-eligible property. §168(n) Qualified Production Property allows 100% bonus depreciation on certain new domestic manufacturing real property — even though real property normally is NOT bonus-eligible.
| Element | Rule |
|---|---|
| Property | New nonresidential real property used in qualified production (US-based manufacturing, refining, agricultural production, chemical production) |
| Placed in service | Generally 2025 after July 4, 2025 and before January 1, 2031 |
| Bonus rate | 100% |
| Election | Per-property election by the taxpayer |
| Purpose | Reshore domestic manufacturing |
Understand the existence of §168(n) QPP as a carve-out from the general rule that real property is not bonus-eligible.
Qualifying Property (General §168(k))
| Requirement | Description |
|---|---|
| MACRS recovery | ≤20 years |
| New or used | Yes (used qualifies if first use by taxpayer) |
| Original use | Must be taxpayer's first use OR purchased used from unrelated party |
| QIP | Qualifies (15-year) |
| §168(n) QPP | 100% bonus even though real property (new carve-out) |
Anti-Churning Rules (Used Property)
| Rule | Description |
|---|---|
| Not previously used | By taxpayer or predecessor |
| Not from related party | Spouse, >50% owned entity, controlled group |
| Not by gift / inheritance | Must be purchased |
Bonus vs. §179 Comparison (Post-OBBBA)
| Feature | Section 179 | Bonus Depreciation |
|---|---|---|
| Mechanism | Election (asset-by-asset) | Automatic (elect out per class) |
| Dollar cap | $2,500,000 (tax years beginning in 2025) | None |
| Phase-out | $4,000,000 (tax years beginning in 2025) | None |
| NOL impact | Cannot create NOL | CAN create / increase NOL |
| Asset selection | Pick specific assets | Per-class only |
| Real property | QIP + HVAC/roofs/security/fire | §168(n) QPP plus QIP |
| 2025 rate | 100% (within $2.5M cap) | 100% post-Jan 19, 2025 (or 40% pre-/election) |
Elect Out
| Rule | Description |
|---|---|
| Election | Per MACRS class (all 5-year, all 7-year, etc.) |
| Irrevocable | Generally requires IRS consent to revoke |
| Why elect out? | Save deductions for higher-rate years; preserve deductions for later years, subject to the applicable NOL rules |
Listed Property (Luxury Autos) — 2025 §280F Caps
| Year | First-Year Cap |
|---|---|
| Year 1 with bonus | $20,200 |
| Year 1 without bonus | $12,200 |
| Year 2 | $19,600 |
| Year 3 | $11,800 |
| Year 4+ | $7,060 |
These caps apply to passenger autos under 6,000 lbs GVWR; heavy SUVs/trucks (>6,000 lbs GVWR) are NOT subject to §280F.
Calculation Example — Post-OBBBA (Tax Year 2025)
Scenario: Equipment cost $1,000,000 (7-year MACRS), acquired and placed in service March 1, 2025. No §179 election.
| Item | Amount |
|---|---|
| Equipment cost | $1,000,000 |
| Bonus (100% — post-Jan 19) | $1,000,000 |
| Remaining basis | $0 |
| MACRS Year 1 | $0 |
Calculation Example — Pre-OBBBA Bifurcation (Tax Year 2025)
Scenario: Equipment cost $1,000,000 (7-year MACRS), placed in service January 10, 2025. No §179 election.
| Item | Amount |
|---|---|
| Equipment cost | $1,000,000 |
| Bonus (40% — pre-Jan 20 placement) | $400,000 |
| Remaining basis for MACRS | $600,000 |
| MACRS Year 1 (7-yr, half-year, 14.29%) | $85,740 |
| Total Year 1 depreciation | $485,740 |
On the Exam
Practice these bonus-depreciation applications:
- Rate / Cutoff Questions: "What is the bonus rate for equipment acquired and placed in service on March 15, 2025?"
- Bifurcation Questions: "Equipment acquired Dec 2024 and placed in service Feb 2025 — bonus rate?" (40% — both dates must be after Jan 19, 2025 for 100%.)
- §168(n) Questions: "What new real property carve-out did OBBBA create?"
- Comparison Questions: "Can bonus create an NOL?" (Yes — unlike §179.)
The key is to remember: 100% bonus PERMANENTLY restored by OBBBA for property acquired AND placed in service AFTER January 19, 2025. Pre-Jan 20, 2025 placements use 40%. A separate lower-rate election applies for the first tax year ending after January 19, 2025. NEW §168(n) Qualified Production Property = 100% bonus for new domestic manufacturing real property (before 2031). 2025 luxury auto Year 1 cap: $20,200 with bonus / $12,200 without.
Sources: 2025 Form 4562 instructions and Rev. Proc. 2025-16, passenger auto limits. The passenger auto limits are prorated for business use.
Taxpayer wants bonus for 7-year property but not 5-year property in 2025. Allowed?
No, all-or-nothing
Yes, elect out per class
Yes, pick individual assets
No, must use §179
Equipment is acquired AND placed in service on March 15, 2025. What is the bonus depreciation rate?
0% (TCJA phase-down complete)
20%
40%
100% (OBBBA — permanent)
Equipment was acquired December 2024 and placed in service February 1, 2025. What bonus rate applies?
100% — placed in service after Jan 19, 2025
60% — original 2024 rate carries over
40% — both acquisition and placed-in-service must be after Jan 19, 2025
0% — TCJA phase-down ended
OBBBA created a new 100% bonus depreciation carve-out for which type of property?
Residential rental buildings placed in service 2025–2030
New domestic manufacturing real property (§168(n) Qualified Production Property)
Used office buildings purchased after July 4, 2025
Land used in agriculture
Sections you finish are checked off in the contents.