The 10 % Construction Completion Rule
For self-constructed property, the IRS has long recognized that acquisition timing is difficult to determine with the same clarity as purchased property. To prevent taxpayers from front-loading construction activity prior to the law’ s enactment, but still claim 100 % bonus depreciation, the OBBBA incorporates a“ 10 % rule.”
Under this rule, property will be disqualified from 100 % bonus depreciation if more than 10 % of the total construction costs are incurred before Jan. 20, 2025.
This safe harbor is designed to prevent abuse while still allowing flexibility for planning. It requires close tracking of construction budgets, contracts and cost certifications. Developers and owners should work with their construction teams and tax advisors to ensure early expenditures stay within the 10 % threshold if bonus eligibility is a priority.
In addition, taxpayers must be mindful of related-party transactions. If a taxpayer acquires property from a related party, or contracts with a related party for construction services, the IRS may scrutinize the timing and substance of those transactions. The IRS may recharacterize a transaction to reflect the true economic reality, particularly where early-phase work( such as site prep or preliminary labor) was performed by a related party before the effective date of the law. Such arrangements could trigger ineligibility under the 10 % rule if not properly documented, or if the relationship creates the appearance of circumventing the intent of the safe harbor.
If Transition Rules Are Not Met
If any of the transition rules are not satisfied, the property will fall under the prior bonus depreciation regime in effect before the OBBBA’ s enactment. This means the taxpayer must apply the applicable bonus rate in effect at the time the property was placed in service. For example, property placed in service during 2025, but failing the acquisition or binding contract tests, may only be eligible for 40 % bonus depreciation— or potentially none in future years, as the original phaseout schedule continues.
PHASEOUT SCHEDULE UNDER THE TAX CUTS AND JOBS ACT
YEAR
DEDUCTION
2018 – 2022 100 %
2023 80 %
2024 60 %
2025 40 %
2026 20 %
2027 0 %
In such cases, the taxpayer must rely on traditional modified accelerated cost recovery system( MACRS) depreciation, unless limited bonus percentages are still available. Proper documentation and legal review of timing, contracts and service dates will be essential to avoid lost deductions or misreporting.
08 | VIEWPOINTS: ISSUE 2 2025