This article is co-authored by Paul Ellis and Bob Yates who both lead our dedicated Real Estate Tax Consulting Group.

The One Big Beautiful Bill Act (OBBBA) represents a landmark shift in tax policy by restoring and permanently reinstating 100% bonus depreciation for qualifying assets. While this provision delivers a significant tax planning opportunity for businesses and investors, eligibility is not automatic. 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 minimize 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 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.

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 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.

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 claiming 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 passage of OBBBA. 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 test, may only be eligible for 40% bonus depreciation—or potentially none in future years, as the original phase-out schedule continues. 

In such cases, the taxpayer must rely on traditional Modified Accelerated Cost Recovery System 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.

Final Thoughts

The reinstatement of 100% bonus depreciation under the OBBBA is a powerful tax incentive, but one that comes with transitional guidelines. Taxpayers must carefully evaluate:

• When the property was acquired (and under what contractual terms).
• When the property is placed in service.
• Whether construction qualifies under the 10% rule.
• If rules are not satisfied, what are the next steps. 

With proactive planning and detailed documentation, taxpayers can explore their eligibility under the new rules and position themselves to fully benefit from this revitalized depreciation incentive.