Bonus Depreciation

What is Bonus Depreciation?

Bonus depreciation is a federal tax incentive that allows businesses to immediately deduct a significant percentage of the cost of eligible property in the year it is placed in service, rather than depreciating the cost over several years. This accelerated deduction is designed to encourage investment in business assets by providing a substantial upfront tax benefit. Bonus depreciation is available to most businesses, regardless of size, and can be claimed in addition to regular depreciation deductions. The rules for bonus depreciation are set out in Internal Revenue Code (IRC) Section 168(k), and the deduction is typically reported on IRS Form 4562.

The Transition Rule: 40% vs. 100% Rates in 2025

For 2025, the bonus depreciation landscape is unique due to a legislative transition. Under the Tax Cuts and Jobs Act (TCJA), the bonus depreciation rate was scheduled to phase down from 100% to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, before being eliminated. However, the One Big Beautiful Bill Act (P.L. 119-21, 2025) made 100% bonus depreciation permanent for property acquired after January 19, 2025. As a result, the applicable rate for 2025 depends on the acquisition date:

• Property acquired and placed in service before January 20, 2025: 40% bonus depreciation applies.
• Property acquired after January 19, 2025: 100% bonus depreciation applies, with no scheduled phase-down.

This transition rule means that businesses must carefully track acquisition and placed-in-service dates to determine the correct bonus depreciation percentage for 2025.

Qualifying Property and Circumstances

To claim bonus depreciation, property must meet several requirements:

• Type of Property: Most tangible property with a recovery period of 20 years or less under MACRS (Modified Accelerated Cost Recovery System) qualifies. This includes machinery, equipment, computers, vehicles, and certain improvements to nonresidential real property (such as qualified improvement property, or QIP).
• Original Use or Acquisition: For property acquired after September 27, 2017, both new and used property can qualify, provided the taxpayer did not previously use the property and did not acquire it from a related party.
• Placed in Service: The property must be placed in service within the applicable tax year.
• Exclusions: Property required to be depreciated under the alternative depreciation system (ADS), property used by certain utilities, and property used in a trade or business with floor plan financing (such as auto dealerships) may be excluded from bonus depreciation.

A bonus depreciation example: If a business acquires and places in service $1 million of qualifying equipment in February 2025, and the property was acquired after January 19, 2025, the business can deduct the full $1 million in 2025 using 100% bonus depreciation.

Interaction with Section 179: Planning Considerations

Section 179 expensing and bonus depreciation are both powerful tools for accelerating deductions, but they operate differently and interact in specific ways:

• Order of Application: Section 179 expensing is applied first, up to the sec 179 limit ($2,500,000 for 2025, with a phase-out threshold of $4,000,000). Any remaining basis after Section 179 is then eligible for bonus depreciation.
• Limits: Section 179 is subject to annual dollar limits and cannot exceed the taxpayer’s taxable business income. Bonus depreciation, by contrast, has no annual dollar cap or income limitation.
• Flexibility: Section 179 allows for selective expensing of assets, while bonus depreciation must be applied to all assets in the same class unless the taxpayer elects out for a class of property.
• State Conformity: Many states do not conform to federal bonus depreciation rules, but may allow Section 179 deductions, so state tax impact should be considered in planning.

To maximize available deductions and credits, businesses should consult with Tax Credits and Incentives Services to ensure they capture all opportunities.

FAQ

What is the bonus depreciation rate in 2025?

The bonus depreciation 2025 percentage is 40% for property acquired and placed in service before January 20, 2025. For property acquired after January 19, 2025, the rate is 100%, with no scheduled phase-down. The applicable rate depends on the acquisition date and when the property is placed in service.

What types of property qualify for bonus depreciation?

Qualifying property includes most tangible business assets with a MACRS recovery period of 20 years or less, such as machinery, equipment, computers, vehicles, and certain improvements to nonresidential real property (qualified improvement property). Both new and used property can qualify if acquisition requirements are met.

How does bonus depreciation interact with Section 179 expensing?

Section 179 expensing is applied first, up to the sec 179 limit, and is subject to income and investment limits. Bonus depreciation is then applied to the remaining basis of eligible property. Unlike Section 179, bonus depreciation has no annual limit and can create or increase a net operating loss.

How is bonus depreciation reported on Form 4562?

Bonus depreciation is reported on Part II of the 4562 form, “Special Depreciation Allowance and Other Depreciation.” Taxpayers must list each asset, indicate the amount of bonus depreciation claimed, and ensure the deduction is properly reflected in their total depreciation expense for the year.

Can bonus depreciation be used with a cost segregation study?

Yes. A cost segregation study can identify components of a building that qualify for shorter recovery periods (such as 5, 7, or 15 years), making them eligible for bonus depreciation. This strategy can significantly increase first-year deductions for real estate investments.