Bonus Depreciation
A tax incentive allowing businesses to immediately deduct a large percentage of the cost of eligible property in the year it is placed in service.
Bonus depreciation (formally Additional First-Year Depreciation Deduction under IRC Section 168(k)) allows businesses to immediately deduct a specified percentage of the cost of eligible business property placed in service during the tax year, rather than depreciating it over the asset's useful life. It is one of the most powerful tools for reducing current-year taxable income.
Eligible property includes tangible depreciable property with a MACRS recovery period of 20 years or less (equipment, vehicles, computers, machinery), qualified film/TV/theater productions, and qualified improvement property (certain improvements to non-residential buildings). Notably, bonus depreciation was expanded by the Tax Cuts and Jobs Act (TCJA) of 2017 to include used property acquired from unrelated parties, a significant expansion from prior law.
The bonus depreciation percentage has been phasing down under TCJA: 100% for property placed in service through 2022; 80% for 2023; 60% for 2024; 40% for 2025; 20% for 2026; then 0% from 2027 unless Congress acts. This phase-down creates significant planning urgency for businesses contemplating large capital expenditures.
Bonus depreciation differs from Section 179 expensing: Section 179 has annual dollar limits ($1.22M for 2024), cannot create or increase a net operating loss, and only applies to property used in active trade or business. Bonus depreciation has no dollar limit, can create or increase an NOL, and applies to rental and passive activity property.
From a cash flow perspective, bonus depreciation can dramatically improve first-year tax positions for capital-intensive businesses. A manufacturer buying $5M in equipment can deduct 60% ($3M) immediately in 2024 rather than spreading it over 5–7 years.
FAQs
Should I always take bonus depreciation?
Not necessarily. While front-loading deductions reduces current-year taxes, it also eliminates future deductions, potentially pushing income into higher-bracket years. For businesses expecting significant income growth, spreading deductions may be more valuable. Also, some states don't conform to federal bonus depreciation, creating state addback requirements.
What is the difference between bonus depreciation and Section 179?
Section 179 allows expensing up to $1.22M annually (2024), cannot create an NOL, and requires property be used in active business. Bonus depreciation has no dollar cap, can create NOLs, and applies more broadly (including rental property). Companies typically maximize Section 179 first, then apply bonus depreciation to remaining eligible assets.
Does bonus depreciation apply to real estate?
Residential and commercial real estate (39-year property) does not qualify. However, Qualified Improvement Property (QIP) — improvements to the interior of non-residential buildings — qualifies for 60% bonus depreciation in 2024. Cost segregation studies identify components of a building that qualify as 5, 7, or 15-year property eligible for bonus depreciation.
Related Terms
R&D Tax Credit
A federal and state tax incentive allowing businesses to claim a credit for qualifying research and development expenditures.
Tax Loss Harvesting
An investment strategy of selling assets at a loss to offset capital gains or ordinary income, reducing current tax liability while maintaining portfolio exposure.
Estimated Tax
Quarterly tax payments required from self-employed individuals and businesses that expect to owe $1,000 or more in taxes not covered by withholding.
