​What Changes to Bonus Depreciation Mean for Your Business

Bonus depreciation is one of those ETTs (Exciting Tax Topics) we like to nerd out about. For this post, you’ll learn a little background as well as some recent changes.

What Is Bonus Depreciation?

Bonus depreciation allows you to speed up the depreciation tax deductions for certain qualifying property, claiming them in the year the property is put into service. In 2023, you can get 80% of the property’s cost as bonus depreciation. But it’s been as high as 100% in the past.

What’s Changing?

In a nutshell, the allowance is being phased out.

In late 2017, bonus depreciation went from 50% to 100%. However, the 100% rate is being phased out gradually in 20% steps. This phase-out began at the end of 2022 and will continue until 2027.

Except for certain aircraft and property with longer production periods, the bonus depreciation rate will decrease:

• To 80% in 2023
• To 60% in 2024,
• And then to 40% in 2025,
• And to 20% in 2026,
• And finally, to 0% in 2027 and subsequent years.

The phase-out for those exceptions is delayed by a year, so they will reach 0% in 2028 instead of 2027.

Bonus Depreciation and Property

New and most used property can qualify for the bonus depreciation allowance. Used property is eligible unless the taxpayer previously used it or acquired it through certain restricted transactions. Those restricted transactions would include tax-free acquisitions or acquisitions from related parties.

Taxpayers can opt to decline bonus depreciation. You can reject bonus depreciation for one or more property classes. That means you’ll claim depreciation deductions using the regular rules over the normal MACRS recovery period. This can be useful if you expect higher tax rates in the years after the eligible property is put into service.

Bonus Depreciation and Vehicles

Vehicles used for business purposes can be eligible for bonus depreciation. But they’re still subject to general deduction limitations, like dollar caps. Even with bonus depreciation, these limitations often prevent you from realizing the full accelerated benefit.

Section 179

Another consideration for smaller businesses is "section 179 expensing." It allows an immediate deduction of the cost of equipment, machinery, certain computer software, and some building improvements. Section 179 expensing has annual dollar limitations and can be reduced to zero for larger businesses. Unlike bonus depreciation, there is no scheduled elimination. So, as bonus depreciation phases down, section 179 expensing becomes more important to consider.

If you have any questions about bonus depreciation, let us know.