Bonus Depreciation and the Component Election: A New Planning Opportunity for Construction Projects

Recent tax legislation has reshaped bonus depreciation once again — creating new opportunities for taxpayers with large construction and improvement projects. While bonus depreciation has been in flux since the Tax Cuts and Jobs Act (TCJA), the One Big Beautiful Bill Act (OBBBA) introduces a significant change: the permanent restoration of 100% bonus depreciation for most qualified property acquired after January 19, 2025.

At the same time, the law highlights an often-overlooked planning tool: the component election. Together, these rules allow certain taxpayers to accelerate deductions on qualifying portions of self-constructed property — even when an entire project does not fully qualify for bonus depreciation.

Bonus Depreciation: What Changed?

Bonus depreciation under IRC §168(k) allows businesses to immediately deduct a portion of the cost of qualifying property in the year it is placed in service. Under the TCJA, bonus depreciation was temporarily increased to 100% for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The bonus rate began to phase down for property placed in service after January 1, 2023.
The OBBBA reverses that trend. For most qualified property acquired after January 19, 2025, 100% bonus depreciation is restored and made permanent. The law also introduces new rules for certain types of building-related property, including qualified production property.

However, projects that began construction before January 19,2025 may not qualify in full — making timing and structure more important than ever.

What Is the Component Election?

The component election allows taxpayers to claim bonus depreciation on specific components of a larger self-constructed asset, even if the overall project does not qualify for 100% bonus depreciation.
This is especially useful for construction projects that span multiple tax years or legislative changes. Instead of evaluating the project as a single asset, taxpayers can isolate and fully depreciate qualifying components acquired or constructed after the effective date.
For purposes of the component election, the “larger self-constructed property” is not the building shell. Instead, it consists of:

• Tangible personal property (IRC §1245 property), and
• Qualified improvement property (QIP) included in the construction contract or project.

This approach shifts the analysis from the building itself to the individual qualifying assets within it.

When Does a Component Qualify?

To qualify for 100% bonus depreciation under the component election, a component must meet four key requirements:

1. Acquired or Constructed After the Effective Date

The component must be acquired or constructed after January 19, 2025.

• For purchased components, the acquisition date is when the taxpayer enters into a binding contract.
• For self-constructed components, construction begins when physical work of a significant nature starts.

2. Must Be Qualified Property

The component must meet the definition of qualified property under IRC §168(k), including:

• Property with a MACRS recovery period of 20 years or less
• Computer software
• Water utility property
• Qualified improvement property

Original use must begin with the taxpayer, or the used-property acquisition rules must be satisfied.

3. Must Be Placed in Service Timely

The component must be placed in service within the applicable bonus depreciation window.

4. Election Must Be Made

Taxpayers must attach a statement to their tax return for the year the larger self-constructed property is placed in service, identifying the specific components for which the election is made.

Binding Contracts and the Safe Harbors

Timing matters. The same acquisition rules that apply to buildings also apply to components:

• A contract is binding only if it is enforceable under state law and does not limit damages to less than 5% of the contract price.
• For self-constructed components, construction begins when physical work of a significant nature starts. Preliminary activities — such as design, financing, and planning — do not count.

Under the 10% safe harbor, construction is deemed to begin when more than 10% of total qualifying costs have been incurred (or paid, for cash-method taxpayers), excluding land and preliminary activities.

Why this matters:

If 10% or less of §1245 property and QIP costs were incurred before January 20, 2025, then all such costs may qualify for 100% bonus depreciation. If more than 10% was incurred before that date, only the portion components acquired or constructed afterward may qualify.

How This Applies to Building Projects

For building projects, the component election requires a detailed cost and timing analysis:

• • 1. Identify the Larger Self-Constructed Asset

For buildings, this includes all §1245 property and QIP within the construction project. Items outside the building — such as parking lots or landscaping — are treated as separate assets.

• • 2. Determine Total §1245 and QIP Costs

For buildings, this includes all §1245 property and QIP within the construction project. Items outside the building — such as parking lots or landscaping — are treated as separate assets.

• • 3. Identify Individual Components

Taxpayers must distinguish between acquired and self-constructed components and determine when each was acquired. Components purchased or acquired before the effective date do not qualify, and installation costs tied to those components also fail to qualify.

• • 4. Evaluate Contracts and Accounting Method

Acquisition timing depends on whether the taxpayer uses the cash or accrual method and whether construction is performed under turnkey or time-and-materials contracts.

• • 5. Determine qualifying components

Analyze the §1245 and QIP components of the self-constructed building and compute the components acquired or self-constructed as of January 19, 2025, and after to determine the applicable bonus depreciation rate.

Why This Matters for Tax Planning

The component election provides a powerful opportunity for construction projects straddling changing bonus depreciation rules. Instead of losing 100% bonus simply because a project began too early, taxpayers may be able to utilize100% bonus depreciation on qualifying components acquired after January 19, 2025.

For cost segregation studies, this adds a new layer of analysis — focusing not only on asset classification but also on acquisition timing and contract structure.

Key Takeaways

• 100% bonus depreciation is permanently restored for most qualified property acquired after January 19, 2025.
• The component election allows taxpayers to isolate and fully expense qualifying portions of larger self-constructed assets.
• For buildings, the focus is on §1245 property and QIP — not the building shell.
• Binding contracts, construction start dates, and the 10% safe harbor are critical to determining eligibility.
• Proper documentation and timely elections are essential to sustaining the benefit.

Next step:

If you’re planning or currently undertaking a construction or renovation project, now is the time to review acquisition timing and asset classifications. A proactive analysis can help ensure you capture every dollar of available depreciation.