The One Big Beautiful Bill Act (the “Act”) includes significant amendments to bonus depreciation under Section 168(k). The Act permanently reinstated “bonus” depreciation at 100% of the cost of eligible property, and refines eligibility criteria and timing rules that trigger when property is acquired and placed in service. With accountants in mind, this article explains the core mechanics of bonus depreciation as modified by the Act, highlights the key acquisition and placed‑in‑service requirements that determine eligibility, and analyzes how these changes affect pricing, structuring, and tax modeling in mergers and acquisitions.
Percentage and Election Mechanics
The Act reinstates 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, across the property classes that meet Section 168(k) requirements. The Act retains the election mechanics that allow taxpayers to opt out of bonus depreciation for one or more classes of property, and it preserves compatibility with Section 179 expensing, which can be layered on eligible investments subject to dollar and income limits.
Receipt of 100% bonus depreciation, often referred to as the “headline percentage,” depends on property acquisition and placed-in‑service timing. If eligible property is not acquired and placed in service within the statutory window for 100% bonus, a lower percentage may apply, or the property may not qualify for bonus depreciation at all. A seemingly minor difference in the placed‑in‑service date can significantly alter the cash tax profile of a deal or a capital program, directly impacting after-tax returns and valuation models for M&A professionals.
Interactions With Other Tax Rules
The revised bonus depreciation regime continues to interact with several areas that are commonly modeled in transactions and capital planning. If 100% bonus depreciation significantly reduces adjusted taxable income (ATI) in early years, the amount of interest that can be deducted under Section 163(j) can be significantly reduced. Constraining interest deductions for highly levered acquisitions can increase taxable income and impact cash flow over the same period where depreciation deductions would be taken if not accelerated by the bonus depreciation regime. Alternative depreciation system (ADS) elections typically disqualify property from bonus depreciation, so ADS considerations for financial reporting or international tax planning should be weighed against the cash tax value of bonus depreciation. Section 179 expensing remains a complementary tool but is subject to investment and income limitations and state conformity concerns. Net operating loss generation, Section 382 limitations for corporations, and the book‑tax differences relevant for financial reporting should be analyzed in concert with the new 100% bonus rules.
Practical Requirements: When Property Must Be Purchased and Placed in Service
From an operational perspective, taxpayers must satisfy four critical eligibility checkpoints to claim 100% bonus depreciation under the Act. First, the property must be acquired by purchase, after the applicable January 19, 2025 effective date. Second, if relying on a written binding contract to establish an acquisition date, the contract must be enforceable under state law and executed by the relevant cutoff date. Third, the property must be placed in service within the statutory window that corresponds to eligibility for 100% bonus depreciation—currently, any time after January 19, 2025. Fourth, the property must satisfy the requirements for new or used bonus depreciation property, which includes limitations on prior use by the taxpayer and acquisitions from related parties.
In addition, the used‑property limitations must be respected: the taxpayer cannot have used the property before acquisition (even if it was a different physical asset performing a similar function), and acquisitions from related parties are generally excluded. While there isn’t a direct “physical component” test per se, the limitation focuses on whether the taxpayer previously used the specific property being acquired, regardless of its physical characteristics. Care should be taken with reorganizations, drop‑downs, and other transactions that produce a carryover basis, as those assets typically do not qualify for bonus depreciation even if physically new to the taxpayer’s operations.
Implications for M&A
The changes to bonus depreciation affect virtually every stage of M&A planning, from initial valuation to post‑close integration, impacting both competitive auctions and bilateral deal negotiations. The most immediate impact is on pricing. 100% bonus depreciation increases the present value of tax shields associated with stepped‑up basis in asset acquisitions and deemed asset acquisitions, supporting greater purchase price capacity for buyers. Purchase price allocations take on added significance, as allocating more value to shorter‑lived tangible property and qualified investment property (QIP) can increase first‑year deductions, subject to valuation support and anti‑abuse rules. In competitive auctions, bidders who can credibly realize 100% bonus deductions may translate that into higher bids or more flexible terms. Similarly, during direct deal negotiations, understanding a buyer’s ability to leverage bonus depreciation can influence discussions around enterprise value and transaction structure.
The structure of the transaction is also affected. With 100% bonus depreciation, buyers tend to favor structures that deliver a basis step‑up, such as asset purchases, Section 338(h)(10) or 336(e) elections for corporate targets, or Section 754 elections for partnership transactions that produce inside basis step‑ups. However, related‑party and carryover‑basis limitations can disqualify bonus depreciation on property involved in certain internal reorganizations or rollover structures, rather than disqualifying a person or type of person from claiming the benefit entirely. This means that property acquired from a related party or in a carryover-basis transaction will not be eligible for bonus depreciation, so sequencing and the use of acquisition vehicles that are unrelated prior to closing can be decisive for maximizing tax benefits.
Timing of closing and placed‑in‑service dates can move real value, meaning that properly managing these timelines can significantly enhance a deal’s financial outcome due to accelerated tax benefits. Deals that close near the end of a tax year often prioritize operational readiness to ensure that critical assets are placed in service timely (and often driven by tax benefits). Integration plans for carve‑outs or add‑ons may accelerate installation and commissioning of equipment, or at least avoid delays, to trigger 100% bonus depreciation earlier. This matters for prospective clients because accelerating the placed-in-service date by even a few months can mean the difference between claiming a 100% deduction in the current tax year versus waiting for a future year, significantly impacting free cash flow and valuation metrics. Earnout structures and contingent consideration may be negotiated with an eye to when assets will be placed in service, particularly if early‑year deductions meaningfully enhance free cash flow.
Financing terms are influenced by the interaction of bonus depreciation with Section 163(j). While larger first‑year deductions reduce cash taxes, they may also depress adjusted taxable income for interest limitation purposes, potentially constraining deductibility in the early years of a highly leveraged buyout. This interplay should be reflected in debt sizing, covenants, and cash sweep modeling to ensure that the financing structure accounts for potential limitations on interest deductibility, which can impact the borrower’s capacity and cash flow. Likewise, expected net operating losses and their utilization constraints, at the federal and state tax levels, should be evaluated to avoid overestimating cash tax benefits.
Takeaways
The Act sets 100% bonus depreciation and reaffirms key eligibility rules and safeguards: acquisition‑by‑purchase and placed‑in‑service timing, and related‑party limitations. For corporate development teams, private equity sponsors, and strategic buyers, the revised rules elevate the importance of transaction structure, purchase price allocation discipline, and integration timelines that align placed‑in‑service dates with current law. These considerations are critical for maximizing the tax benefits. For sellers, understanding the buyer’s tax shield under various structures can inform negotiations on gross price, earnouts, and indemnities. Across the board, careful documentation of acquisition dates, written binding contracts, and placed-in‑service milestones will be essential to secure the intended benefit and withstand scrutiny, reinforcing the importance of diligent execution across the M&A lifecycle.
