How Timing Impacts Bonus Depreciation and QSBS

Recent tax legislation from the OBBBA created two unexpected groups of taxpayers facing unique challenges. If you purchased property or received certain stock at the wrong time, you may be caught in restrictive depreciation and exclusion rules that could impact your tax strategy. Let’s break down what’s happening and what options may still be available.

Group One: Property Purchased January 1–19 (and in Some Cases, Before)

Bonus Depreciation Limits

For those who bought property or placed assets in service between January 1st and January 19th, 100% bonus depreciation is off the table. Instead, these purchases are locked into 40% bonus depreciation.

This rule doesn’t just apply to those who officially “owned” property during that window. If you had a binding contract enforceable under state law, you’re subject to the same limitation.

• Not enforceable: Letters of Intent (LOIs and, potentially, a signed contract on a property and the recourse is less than 10% of the purchase price)
• Enforceable: Signed closing documents or other contracts recognized under state law

Even jets purchased at the end of 2024 but delivered in May 2025 fall into this 40% threshold.

This same scenario applies to a rental property purchased before January 19th and placed in service after January 19th.

What About Development and Construction Projects?

This cutoff is particularly frustrating for real estate developers and construction professionals, many of whom had projects spanning this timeframe. Common questions include:

• What if construction started in 2023 but finished in 2025?
• What if work began in early January and completion isn’t until late 2025?

Fortunately, guidance from prior years provides a roadmap. Two frameworks can help determine eligibility:

1. The 10% Completion Rule (§ 1.168(k)-2(b)(5))

If you’ve incurred more than 10% of total project costs before January 19th, the property is considered placed in service before the cutoff date, meaning you’re stuck with 40% bonus depreciation.

If less than 10% of costs were incurred before January 19th, you may still qualify for 100% bonus depreciation.

2. The Component Election (§ 1.168(k)-2(c)(2))

Even if your project doesn’t qualify under the 10% rule, you may elect to treat components separately. Any portion of the property placed in service after January 20th could still be eligible for 100% bonus depreciation.

While unusual, this is a quirk we’ll only need to navigate for one year (or once a decade, it seems).

Options exist, but you’ll need to analyze carefully.

Group Two: C-Corp Stock Issued Before July 4th

QSBS Changes and New “Off-Ramps”

Section 1202 (Qualified Small Business Stock, or QSBS) was expanded under the new legislation. Previously, investors could exclude 100% of gains after holding for five years. Now, there are earlier exit opportunities:

• 3-year hold: 50% gain exclusion (remaining gain taxed at 28%)
• 4-year hold: 75% gain exclusion (remaining gain taxed at 28%)
• 5-year hold: 100% gain exclusion

Additional updates:

• Exclusion limit increased to $15M (up from $10M)
• Aggregate asset threshold raised to $75M

The Catch

These benefits only apply to stock issued after July 4th. Any stock issued before the cutoff is stuck under the old rules.

And if you’re considering a reorganization (like an F Reorg) to reset the holding period? That won’t work because these structures preserve the original holding period. You can’t restart the clock to qualify for new treatment.

Key Takeaways

• Real estate investors and developers: Be mindful of how the cutoff date impacts bonus depreciation. The 10% rule and component election may provide relief.
• QSBS investors: Timing matters. Only stock issued after July 4th qualifies for the new exclusions and higher thresholds.

These quirks highlight just how critical timing can be in tax planning. With careful analysis, there are still strategies to mitigate the impact.

Book a discovery call with our team today.