Bonus depreciation is an immediate tax deduction that speeds up tax savings and makes an asset that you placed in service more affordable. You may also see this deduction going by the name of the special allowance, the additional first-year deduction, or IRC §168 (k) depreciation.
In general, new and used furniture and equipment with a less than 20-year Modified Accelerated Cost Recovery System (MACRS) life will qualify for bonus depreciation. Congress created this deduction as an incentive for business owners to purchase qualifying assets and to engage in business activity.
Bonus depreciation should not be confused with Section 179 depreciation, which allows for an immediate deduction of the cost of an asset. There are important differences between section 179 vs bonus depreciation, including the type of property that qualifies for each deduction.
How To Calculate Bonus Depreciation
You can calculate your bonus depreciation by following these three steps.
- Step 1: Subtract the original cost by any section 179 expense deducted for the year.
- Step 2: Reduce the basis by the applicable percentage of any credits you claimed (such as the 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.
Business owners can claim 100% bonus depreciation on property placed in service before 2023. For property placed in service after 2022, 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% |
Pros & Cons of Bonus Depreciation
PROS | CONS |
---|---|
Reduces your taxable income and overall tax liability, which means more money in the bank | Cannot pick and choose 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 |
How To Claim Bonus Depreciation
Good 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 on Part II, line 1. As for listed property, bonus depreciation will appear on Part V, line 25. Visit our guide to the best business tax software to find your tax software.
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:
Which Assets Qualify for Bonus Depreciation
Bonus depreciation applies to new or used qualified property. Under IRS guidelines, qualified business property is MACRS property with a recovery period of 20 years or less, depreciable computer software, water utility property, or qualified improvement property.
The following property qualifies for bonus depreciation:
- Office furniture: Includes desks, files, safes, communications equipment, and similar items
- Information systems: Includes computers and peripheral equipment, such as card readers, printers, projectors, and disc drives, used in conducting normal business activity.
- Vehicles: Includes cars, trucks, vans, and even over-the-road semis; however, bonus depreciation on passenger automobiles that weigh 6,000 pounds or less is limited to $8,000.
For a more detailed list of MACRS properties, check out IRS Publication 946, Appendix B – Table of Class Lives and Recovery Periods. Also, note that if you use qualified property for less than 50% of business use, bonus depreciation cannot be claimed.
Let’s take a look at a couple of examples of how bonus depreciation could play out with MACRS property.
Example 1: In January 2024, Bob Builder purchased office furniture for their new construction firm. They paid $500 for the furniture. Office furniture is 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 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 now claim bonus depreciation of 60% of the remaining $400 cost, or $240. So, in total Bob 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 a 27½-year or 39-year property, such as a warehouse, office building, or residential rental property, you may want to think about performing a cost segregation analysis. Cost segregation studies are in-depth analyses of the cost of components and fixtures inside of buildings and typically are 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. So, any equipment, furniture, and fixtures, such as a heating, ventilation, and air conditioning (HVAC) system, on the property will 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, and 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.
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.
1. Do nothing and claim the 100% bonus depreciation.
By doing nothing, you’ll claim 80% (60% for 2024) bonus depreciation automatically for property that you have placed in service during the 2023 tax year.
2. Attach an election to not use any bonus depreciation.
You can also 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.
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.
If you find yourself in any of the above scenarios, you need to attach a statement showing the class of property to a timely filed tax return, including extensions. 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).
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 the deduction will be 0% by 2027.
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.
Bottom Line
Bonus depreciation is a valuable cost-saving tax incentive that you do not want to miss out on. It allows you to deduct 80% (60% for 2024) of the cost of an asset in 2023, as opposed to depreciating its cost over the useful life.