Bonus Depreciation: Deducting Eligible Property and Business Costs

You may know that depreciation lets you spread out the cost of certain fixed assets over time. But what about bonus depreciation? Depending on your circumstances, this alternative method gives you additional flexibility in deducting those costs — which may work out better for your business. Interested in learning more? Read on!

What is bonus depreciation?

Regular depreciation allows your business to write off the cost of tangible property or an asset over its life, that is, the number of years the asset will be used. It is an expense that can offset income to immediately lower the tax due on income. The government knows businesses can stimulate the economy by buying things, so this provides an incentive for small businesses to do so.

Essentially, bonus depreciation, also referred to as the additional first-year depreciation deduction, allows your business to take an immediate first-year deduction on the purchase of eligible business property in addition to the asset’s regular depreciation schedule. It is a quicker depreciation schedule for a more immediate expense deduction. You report bonus depreciation on Form 4562.

In other words, it’s a method of accelerated depreciation, so businesses can deduct the cost of qualifying property in the year it is put into service, reducing the business’ tax liability.

Bonus depreciation and tax reform

The Tax Cut and Jobs Act (TCJA) included a provision for bonus depreciation that allows a deduction for 100% of the purchase price of qualifying property. Previously, the tax deduction was 50%.

The deduction rate depended on when the eligible depreciable property was placed in service. This provision applies to qualifying property acquired and placed in service after September 27, 2017, and before January 1, 2023.

After January 1, 2023, the rates will step down each year, with an expected phaseout by 2027:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0%

Bonus depreciation rule: What qualifies as an eligible asset?

Wondering what qualifies for bonus depreciation? Not all property qualifies for the 100% bonus depreciation deduction.

Several requirements must be met for property to qualify:

1. The property must have a MACRS (Modified Accelerated Cost Recovery System) recovery period of 20 years or fewer for property other than building structures or systems.
2. The property can’t be excluded from bonus depreciation.
3. Bonus depreciation is only allowed the year the property is placed in service.
4. Even if property qualifies for bonus depreciation, you may opt out of this provision and use the applicable MACRS depreciation method instead.

Vehicles will also have different bonus depreciation limits, depending on their type and size. For example, vehicles with a gross vehicle weight of 6,000 pounds or less are limited to $8,000 of first-year bonus depreciation. The remaining cost is depreciated under special rules, found in IRS publication 946. Combined first-year depreciation (bonus plus regular) is limited to $20,400 for passenger cars (other than heavy SUVs), trucks, and vans.

This IRS table highlights vehicle depreciation limits.

Don’t want to navigate the tax nuances of bonus depreciation alone? Get help with your small business taxes from the team at Block Advisors.

“I am a new business owner and this was the first time I did my taxes as such. My tax professional was very informative and positive and she really helps me out as far as giving me the understanding of how taxes for small businesses work and therefore I didn’t feel so stressed.”

– Leah Hayes, Leah’s hair studio

Bonus depreciation vs. a Section 179 deduction

Bonus depreciation and Section 179 expensing both allow an immediate deduction, but they do it in different ways.

Bonus depreciation has a couple of advantages:

1. It creates a net operating loss (NOL) whereas Section 179 is limited to taxable income.
2. If the business use percentage of a property falls below 50%, deductions claimed under Section 179 must be recaptured (more on that below) as ordinary income. Whereas those claimed as bonus depreciation don’t have to be recaptured until the property is sold.

Note: Some properties qualify for 100% expensing under both Section 179 and bonus depreciation. For more information, read our article on Section 179 deductions for vehicles.

State tax treatment of bonus depreciation

Another important consideration is your state income tax treatment of the depreciable property. It’s common for states to require a smaller depreciation deduction even though you qualify for 100% bonus depreciation or Section 179 expensing on your federal tax return. So, if you decide to use 100% bonus depreciation on your federal return, you may have to keep a separate depreciation schedule for state income tax purposes.

What about bonus depreciation recapture?

Wondering who qualifies for bonus depreciation recapture? Any business entity qualifies for bonus depreciation recapture.

Get help with bonus depreciation on qualified property

All these considerations require a careful analysis of your particular financial and tax situation. At Block Advisors, we have the expertise and experience to help you make the decision that’s best for you. Get back to the tasks you enjoy and let us handle your business taxes, bookkeeping, and payroll.

Make an appointment.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.