Understanding Transition Rules
A set of detailed transition rules determines whether a property qualifies under the newly expanded bonus depreciation framework. Understanding and applying these rules correctly is essential to minimizing the risk of compliance failures or disallowed deductions.
The Acquisition Test
The initial qualifier in the eligibility analysis is the acquisition test. Under § 168( k), as amended by the OBBBA, property must be acquired after Jan. 19, 2025, to qualify for 100 % bonus depreciation. This means the taxpayer must either purchase the asset outright or have a binding contract. For self-constructed properties, follow the 10 % rule mentioned later.
Assets acquired before Jan. 20, 2025— regardless of when they are placed in service— generally do not qualify for the enhanced 100 % bonus treatment. This rule ensures only investments following the enactment are eligible.
Importantly, the term“ acquired” is interpreted broadly and ties directly into the binding contract test.
The Binding Contract Test
In conjunction with the acquisition test, the IRS applies a binding written contract test to determine whether the taxpayer was already committed to purchasing the property before Jan. 20, 2025. Under this rule, if the property is acquired pursuant to a binding written contract executed before Jan. 20, 2025, it is not eligible for 100 % bonus depreciation— even if it is placed in service after that date.
A binding contract is defined as one that is enforceable under state law and not subject to termination by either party without substantial penalty. The IRS generally considers a“ substantial penalty” to be at least 5 % of the total contract price. If the penalty for cancellation is less than 5 %, the agreement may not be treated as binding, which could preserve eligibility depending on other facts.
Binding Contract Test Example
If a taxpayer signed a purchase agreement for a property on Dec. 31, 2024, but the agreement includes a termination clause with only a 2 % cancellation fee, it may not constitute a binding contract under the IRS standard. In that case, the asset could potentially still qualify for 100 % bonus depreciation— provided it is acquired and placed in service after Jan. 19, 2025.
Because the determination hinges on contract language, enforceability and penalties, taxpayers should work with counsel to review agreements signed near the cutoff date. A small change in terms— like increasing or reducing the cancellation fee— could materially impact the property’ s eligibility for bonus depreciation.
The Placed-in-Service Test
Even if both the acquisition test and binding contract test are satisfied, property is not eligible for 100 % bonus depreciation, unless it is placed in service on or after Jan. 20, 2025.
“ Placed in service” is defined by U. S. Treasury regulations as the point at which the asset is ready and available for its intended use in the taxpayer’ s business. For example, machinery must be installed, and functional and rental property must be ready for occupancy.
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