Bonus Depreciation Rules Under Current Law

Bonus depreciation is a federal tax incentive that allows businesses to deduct a large percentage of an eligible asset's cost in the year it is placed in service, rather than recovering that cost gradually through standard depreciation and amortization rules. Governed by Internal Revenue Code (IRC) Section 168(k), the provision has undergone significant structural changes since the Tax Cuts and Jobs Act of 2017 (TCJA), including a scheduled phase-down that reduces the allowable percentage each year. Understanding the current deduction percentage, asset eligibility criteria, and interaction with other expensing provisions is essential for accurate business tax filing requirements and capital planning.

Definition and Scope

Bonus depreciation, formally defined under IRC § 168(k), permits an accelerated first-year deduction for qualified property acquired and placed in service during a given tax year. Unlike Section 179 expensing, which is capped based on business income and annual dollar limits, bonus depreciation historically carried no income limitation and no per-taxpayer dollar cap.

The TCJA, enacted December 22, 2017, expanded bonus depreciation to 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023. That 100% rate triggered a phased reduction schedule embedded in the statute:

  1. 2023: 80% bonus depreciation rate (IRC § 168(k)(6)(A)(i))
  2. 2024: 60% bonus depreciation rate
  3. 2025: 40% bonus depreciation rate
  4. 2026: 20% bonus depreciation rate
  5. 2027 and beyond: 0% under current statutory law (absent legislative extension)

The IRS publishes guidance on these phase-down rates in Revenue Procedure 2019-33 and annual depreciation guidance documents. Taxpayers electing out of bonus depreciation must use the applicable Modified Accelerated Cost Recovery System (MACRS) schedule instead.

How It Works

Bonus depreciation applies to "qualified property," a term the IRS defines through regulation and statute. The core requirements are:

  1. Original use or used property: The TCJA expanded eligibility to include used property, provided the taxpayer has not previously used the property and has not acquired it from a related party under IRC § 267 or § 707(b).
  2. Depreciable life of 20 years or less: Most machinery, equipment, computers, office furniture, and qualified improvement property (QIP) qualify. Real property with a 27.5-year or 39-year recovery period does not qualify unless it falls under a specific category.
  3. Placed in service: The asset must be placed in operational service — not merely purchased — within the applicable tax year.
  4. Not excepted property: Certain listed property subject to alternative depreciation system (ADS) requirements, property used by tax-exempt entities, and property with tax-exempt financing is excluded (IRC § 168(k)(2)(D)).

The mechanics are straightforward: a business acquires a qualifying asset for $500,000 in a year when the bonus rate is 60%. The first-year deduction equals $300,000; the remaining $200,000 is recovered over the MACRS schedule for that asset class. No binding election is required to take bonus depreciation — it applies by default — but taxpayers can elect out on a class-by-class basis using Form 4562 (IRS Form 4562 Instructions).

Bonus depreciation interacts directly with Section 179 expensing. Section 179 is applied first; bonus depreciation then applies to the remaining depreciable basis. When combined, these two provisions can shelter substantial taxable income in acquisition-heavy years.

Common Scenarios

Manufacturing and construction equipment: A manufacturing firm acquiring $2 million in CNC machinery in a 60% bonus year deducts $1.2 million immediately, recovering the balance over a 7-year MACRS schedule. This front-loads tax relief into the acquisition year.

Qualified improvement property (QIP): The TCJA assigned QIP — interior improvements to nonresidential real property after the building is placed in service — a 15-year MACRS recovery period, making it eligible for bonus depreciation. This corrected a legislative drafting error from the original 2017 law, retroactively fixed by the CARES Act of 2020 (CARES Act § 2307).

Vehicles: Passenger automobiles are subject to luxury auto limits under IRC § 280F, which caps first-year depreciation regardless of bonus rates. For 2023, the IRS set the first-year limit for a passenger vehicle with bonus depreciation at $20,200 (Rev. Proc. 2023-14).

Pass-through entities: Partnerships and S corporations pass bonus depreciation deductions through to owners. The deduction may interact with the at-risk rules (IRC § 465) and passive activity rules (IRC § 469), potentially limiting the usable deduction in a given year. See pass-through entity taxation for structural context.

Decision Boundaries

Bonus depreciation is not always the optimal election. Structured analysis of the following factors determines the appropriate approach:

Bonus depreciation vs. Section 179: Section 179 carries a 2024 deduction limit of $1,220,000, with a phase-out beginning at $3,050,000 in total property placed in service (IRS Rev. Proc. 2023-34). Bonus depreciation has no dollar cap but follows the statutory phase-down percentage. For businesses exceeding Section 179 thresholds, bonus depreciation fills the gap.

Tax rate timing strategy: When marginal tax rates are expected to rise in future years, accelerating deductions through bonus depreciation increases present-value tax savings. When rates are expected to fall — or when the business is in a loss position — electing out of bonus depreciation and spreading recovery over the MACRS schedule may produce better long-term results. This intersects with federal tax brackets and rates planning.

State conformity: Not all states conform to federal bonus depreciation. California, for example, does not allow bonus depreciation for state income tax purposes, requiring a separate state depreciation calculation. Taxpayers operating in non-conforming states carry deferred state tax liabilities even when the federal deduction is immediate.

Alternative Minimum Tax (AMT): Corporations subject to the Corporate Alternative Minimum Tax (CAMT) under the Inflation Reduction Act of 2022 may find that bonus depreciation deductions are partially recaptured for CAMT purposes. Individual AMT exposure is addressed separately under alternative minimum tax rules.

Election out procedures: An election out of bonus depreciation must be made by the due date (including extensions) of the tax return for the year the property is placed in service. The election is irrevocable without IRS consent (Treas. Reg. § 1.168(k)-2(e)(1)(ii)).

References

📜 12 regulatory citations referenced  ·  ✅ Citations verified Feb 26, 2026  ·  View update log

Explore This Site

Regulations & Safety Regulatory References Tools & Calculators Compound Interest Calculator