September 18th 2025.
Have you heard about the 100% bonus depreciation on tangible personal property assets? It's a great opportunity that is available for assets purchased and put into use after January 19, 2025. Sounds pretty simple, right? Well, it may not be as straightforward as it seems.
Let's break it down. The first part is easy - the date. You can just check a calendar for that. The second part, which involves tangible property, is also relatively simple. The rule is that any property with a class life of 20 years or less is eligible for bonus depreciation. But there's one requirement that may not be as obvious as the others - the "purchase" requirement.
According to the Section 168 statute, the definition of a purchase is determined by looking at Section 179. And here's where it gets a bit tricky. The law states that a purchase is any acquisition of property, but with some exceptions. For example, the property cannot be acquired from a person who would result in the disallowance of losses under section 267 or 707. In simpler terms, you cannot purchase property from someone who is considered a related party. This rule is in place to prevent any manipulation of the bonus depreciation deductions by families or family-owned businesses.
Another exception to the purchase requirement is if the property is acquired by one component member of a controlled group from another component member of the same controlled group. And finally, the basis of the property in the hands of the person acquiring it cannot be determined by the adjusted basis of the property in the hands of the person from whom it was acquired, or under section 1014. This may sound confusing, but essentially it means that the purchase must be made at fair market value and not as a contribution to a partnership or corporation.
So, what does all of this mean? Simply put, there are certain restrictions on who can purchase the property in order to be eligible for bonus depreciation. For example, if you and your spouse purchase a short-term rental property, you may be able to claim bonus depreciation. But if you then contribute that property to an LLC that you both own, the bonus depreciation would not be allowed since the partnership did not make the purchase.
Another thing to keep in mind is that bonus depreciation does not apply to inherited property. This means that if you acquire property from a decedent and the tax law resets the basis to fair market value, you cannot claim bonus depreciation. Instead, you would use the regular MACRS depreciation method. This rule is in place to prevent double-dipping on deductions.
It's also worth noting that if someone buys into a partnership or inherits an interest in a partnership with tangible property, the partnership may adjust the basis and depreciation numbers for that partner's share of the property. However, the regulations for Section 168 specifically exclude taking bonus depreciation on this amount created via a Section 754 election.
But it's not all restrictions and limitations. There are certain situations where bonus depreciation can still be claimed, such as in a Section 1031 like-kind exchange. This means that if you trade property for a similar property, you may be able to claim bonus depreciation on the new property. For example, if you trade land for a building and a portion of that building is considered tangible personal property, you may be able to claim bonus depreciation on that portion.
The same applies for Section 1033 involuntary conversions, which involve the loss of property due to an unforeseen event. In these cases, the accounting for the involuntary conversion works similarly to a like-kind exchange, and bonus depreciation may be applicable on the new property's basis.
In conclusion, while the 100% bonus depreciation may seem like a straightforward concept, there are certain requirements and exceptions that should be considered. It's important to understand these rules in order to take full advantage of this tax benefit. So, keep these guidelines in mind when making any future purchases of tangible personal property assets.
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