The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation for many assets placed in service on or after January 20, 2025. However, not every asset placed in service after that date automatically qualifies for the 100% deduction.
Special transition rules apply to certain property that was acquired before January 20, 2025, but wasn't placed in service until after January 19, 2025. For these assets, taxpayers may be limited to a 40% special depreciation allowance instead of the full 100% deduction.
If your business purchased equipment, machinery, vehicles, or other qualifying property before January 20, 2025, but didn't begin using it until a later tax year, it's important to understand how these rules affect your depreciation deduction.
What Is the 40% Special Depreciation Allowance?
The 40% special depreciation allowance is a transitional bonus depreciation rule that applies to certain property acquired before the effective date of the OBBBA's permanent 100% bonus depreciation provisions.
Under this rule, eligible taxpayers can generally deduct 40% of the property's depreciable basis in the first year the asset is placed in service. The remaining basis is recovered through regular depreciation methods unless another depreciation provision applies.
This treatment prevents some property acquired under the old bonus depreciation rules from automatically receiving the new 100% deduction.
When Does the 40% Rule Apply?
The 40% special depreciation allowance generally applies when:
- The property was acquired before January 20, 2025;
- The property is otherwise eligible for bonus depreciation;
- The property was placed in service after January 19, 2025; and
- The property does not qualify for the new 100% bonus depreciation treatment under the applicable transition rules.
Both the acquisition date and the placed-in-service date matter. Simply placing an asset in service after January 19, 2025, does not automatically make it eligible for 100% bonus depreciation.
What Does "Acquired" Mean?
In general, property is acquired when the taxpayer enters into a binding contract to purchase the asset or otherwise becomes entitled to acquire it.
For depreciation purposes, the acquisition date is often different from the placed-in-service date.
Example
A business signs a contract to purchase a machine on December 15, 2024.
The machine is delivered and installed during February 2025.
The machine is ready and available for business use on March 1, 2025.
In this example:
- Acquisition date: December 15, 2024
- Placed-in-service date: March 1, 2025
Because the property was acquired before January 20, 2025, special transition rules may apply.
What Does "Placed in Service" Mean?
Property is placed in service when it is ready and available for its intended business use.
This doesn't necessarily mean the property is actively being used. Instead, it must be capable of performing the function for which it was acquired.
For example:
- Manufacturing equipment is placed in service when installation and testing are complete.
- A business vehicle is placed in service when it is available for business use.
- Computer equipment is placed in service when it is installed and operational.
The placed-in-service date determines when depreciation begins.
How Is the 40% Deduction Calculated?
The calculation is generally straightforward.
Example
Assume a taxpayer purchased qualifying equipment before January 20, 2025, for $100,000.
The equipment was not placed in service until 2026.
If the property is subject to the 40% special depreciation rule:
- Asset cost: $100,000
- Special depreciation percentage: 40%
- First-year deduction: $40,000
The remaining $60,000 basis would generally be depreciated using the asset's regular depreciation method and recovery period.
Why Doesn't the Property Qualify for 100% Bonus Depreciation?
The OBBBA created specific transition rules to distinguish between:
- Property acquired under the prior bonus depreciation regime, and
- Property acquired after the effective date of the new law.
Congress included these rules to define which assets receive the permanent 100% deduction and which remain subject to transitional depreciation percentages.
As a result, taxpayers must carefully review both acquisition and placed-in-service dates when determining the correct depreciation allowance.
What Records Should You Keep?
To support your depreciation deduction, keep documentation showing:
- Purchase agreements
- Contracts
- Invoices
- Delivery records
- Installation records
- Payment documentation
- The date the asset was placed in service
These records help establish both the acquisition date and the placed-in-service date, which are critical when applying the transition rules.
How Do You Report the Deduction?
To report your depreciation, go to:
- Federal
- Income (Select my forms)
- Profit or Loss from Business/Farming/Rentals and Royalties
- Depreciation
- Assets
- If your asset meets the requirements above and you do not opt out, the 40% will automatically calculate.