Bonus depreciation is a form of accelerated depreciation that offers an immediate tax deduction, speeds up tax savings, and makes an asset that you placed in service more affordable.
What Is Bonus Depreciation? How It Works & How to Calculate
You may see bonus depreciation referred to as the special allowance, the additional first-year deduction, or IRC §168 (k) depreciation. Congress created this deduction to stimulate business activity by encouraging business owners to purchase qualifying assets. Without the use of a special accelerated depreciation method, the deduction for the purchase of a business asset would generally need to be apportioned over the course of multiple tax periods.
Bonus depreciation should not be confused with section 179 depreciation, which allows for an immediate deduction of the full cost of an asset. Bonus depreciation from 2023 onward only allows for a percentage of the property to be deducted immediately, but that percentage is still more than what would be deductible using non-accelerated methods.
How Bonus Depreciation Works
Business owners can claim 100% bonus depreciation on property placed in service before 2023. For property placed in service in 2023 and beyond, the following bonus depreciation rate applies:
Year the asset was placed in service | Bonus depreciation rate |
|---|---|
2023 | 80% |
2024 | 60% |
2025 | 40% |
2026 | 20% |
After 2026 | 0% |
Bonus depreciation applies to new or used qualified property. Under IRS guidelines, qualified business property is MACRS Modified Accelerated Cost Recovery System property with a recovery period of 20 years or less, depreciable computer software, water utility property, or qualified improvement property.
Qualified improvement property excludes residential real estate. Whether or not improvements to mixed-use property qualify is contingent upon how the building is used when the improvements were placed in service.
The following property qualifies for bonus depreciation:
The following does not qualify for bonus depreciation:
For a more detailed list of MACRS properties, check out IRS Publication 946.
You are generally not permitted to take bonus depreciation for property bought and sold in the same year. Even if you reacquire bonus depreciation-eligible property in a subsequent year after having originally bought and sold it in a previous year, no bonus depreciation is permitted in either year.
- Example 1: In January 2024, Bob Builder purchased office furniture for $500 for their new construction firm. Office furniture is a seven-year MACRS property, and they’re claiming 60% bonus depreciation since it was purchased in 2024. They do not have any other applicable credits or deductions, so they can claim a $300 ($500 × 60%) bonus depreciation deduction when they file their 2024 tax return. In addition to the bonus depreciation, Bob Builder can claim regular MACRS depreciation over seven years for the remaining cost of $200.
- Example 2: Let’s use the same facts as above, but Bob Builder claims $100 of Section 179 on the office furniture. Bob can now claim bonus depreciation of 60% of the remaining $400 cost, or $240. So, in total, they can deduct $100 of Section 179, $240 of bonus depreciation, plus regular MACRS depreciation over seven years on the remaining $160 of cost.
Maximizing Bonus Depreciation With a Cost Segregation Analysis
If you’re a business owner who owns property such as a warehouse, office building, or residential rental property, then you may benefit from a cost segregation analysis Cost segregation studies are in-depth analyses of the cost of components and fixtures inside of buildings. These studies are typically performed by a qualified individual such as an engineer, appraiser, or contractor. . By segregating the cost of MACRS property with shorter lives from the cost of the building, you can claim bonus depreciation on the individual components of property. This allows for equipment, furniture, and fixtures—such as HVAC systems—to be eligible for bonus depreciation.
During the study, the components that make up the building will be analyzed and given a recovery period of five, seven, or 15 years. This can be a great strategy to help you take advantage of the bonus depreciation deduction, create tax savings, and increase your cash flow.
Pros & Cons of Bonus Depreciation
| PROS | CONS |
|---|---|
| Creates a tax savings by reducing your taxable income and overall tax liability | Doesn’t let you pick which assets to claim bonus depreciation on; all assets within a class life must be treated the same |
| Creates a large deduction in the year of purchase even if financed over multiple years | Is scheduled to phase out by 2027 |
| Is available for new and most used property and some building improvements | Is unideal in situations where the taxpayer has expiring carryforward credits or deductions they need to use; bonus depreciation will decrease income needed to absorb the other income reductions |
| Is not limited to taxable income or a maximum deduction the way other accelerated methods are, like Section 179 | |
How to Calculate Bonus Depreciation
You can calculate bonus depreciation by following this process:
- Step 1: Reduce the original cost by any section 179 expense deducted for the year. Original cost includes line items such as sales tax and delivery fees.
- Step 2: Further reduce the cost by any credits you claimed (e.g., energy credit).
- Step 3: Multiply the bonus rate of 60% for 2024 (80% for 2023) by the remaining cost of the asset.
The product will yield the amount of bonus depreciation you can claim for the tax year.
How to Claim Bonus Depreciation
The best tax software will calculate the amount of bonus depreciation you can deduct on IRS Form 4562. The bonus depreciation allowance for:
- Qualified property (other than listed property) will appear in Part II, line 1
- Listed property will appear on Part V, line 25
Listed property are assets often used for both personal and business purposes, such as computers and automobiles.
Depending on how your business is structured, the amount of bonus depreciation reported on Form 4562 will be carried over to one of the following forms:
- Schedule C
- Form 1120
- Form 1120S
- Form 1065
You may like our related guides:
Election to Opt Out of Bonus Depreciation
While it’s generally beneficial for you to speed up depreciation, you do have the option of opting out of bonus depreciation. If you have expiring charitable deduction carryforwards or credit carryforwards, you may decide to opt out. Since charitable deduction carryforward and other credits are limited by your taxable income, you may decide not to claim bonus depreciation to keep your current income high enough to take full advantage of any carryforwards or credits that may be expiring.
1. Do nothing and claim 60% bonus depreciation for 2024.
By doing nothing, you’ll automatically claim 60% bonus depreciation on your 2024 tax return for property that you have placed in service during the 2024 tax year.
2. Attach an election to not use any bonus depreciation.
You can opt out of claiming bonus depreciation and instead calculate your depreciation under the normal MACRS rules. The election is made separately for each asset class. For instance, you can elect out of bonus depreciation for five-year property but still claim bonus depreciation for seven-year property.
Let’s look at what this election statement should look like.
Title: Election Out of Special Depreciation Allowance of Code Section 168(k)
First name: Bob Builder
Tax identification number: -000-00-0000
Attachment to Form 4562: Tax Year Ending Dec. 31, 2024
Electing out: I, Bob Builder, am electing out of the special 60% depreciation allowance for all seven-year property placed in service during the tax year 2024, which would otherwise qualify for the special depreciation allowance under Code Section 168 (k).
First name: Bob Builder
Tax identification number: -000-00-0000
Attachment to Form 4562: Tax Year Ending Dec. 31, 2024
Electing out: I, Bob Builder, am electing out of the special 60% depreciation allowance for all seven-year property placed in service during the tax year 2024, which would otherwise qualify for the special depreciation allowance under Code Section 168 (k).
Frequently Asked Questions (FAQs)
No, the Tax Cuts and Jobs Act (TCJA) changed this rule, and you can now claim bonus depreciation for new and used property that meets certain requirements.
In 2024, bonus depreciation will be reduced from 80% to 60%. It’ll continue to be reduced each year until it is completely eliminated after 2026.
No, bonus depreciation is automatic, but you can elect to opt out of bonus depreciation for an entire asset class. However, you cannot choose individual assets within the class to be depreciated differently. Once the election is made, it applies to all assets in the same class. Opting out bonus depreciation for one asset class does not affect bonus depreciation for other asset classes. For example, you can opt out for all seven-year property but still claim bonus depreciation for all five-year property.
If placed in service after 2015, no AMT adjustment is required for property subject to bonus depreciation unless there is a difference between AMT and tax basis.
Bottom Line
Bonus depreciation is a valuable cost-saving tax tool. It allows you to deduct 60% of the cost of an asset purchased in 2024, as opposed to depreciating its cost over the useful life. Bonus depreciation is just one component of your entire tax computation. Read our guide on how to calculate small business taxes to get more information on how to finalize numbers for your tax return.
