Bonus Depreciation

Key takeaways

• Bonus depreciation lets businesses immediately deduct a large portion of the cost of eligible assets in the year they are placed in service, instead of spreading the deduction over the asset’s useful life.
• The Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100% for qualifying property; that 100% allowance is scheduled to phase out by the end of 2027.
• Not all property qualifies—requirements include tangible property with a MACRS life of 20 years or less, certain computer software, water utility property, and qualifying film/TV/theatrical productions.
• Bonus depreciation is not dollar-capped and can exceed taxable business income; Section 179 is limited by dollar and income caps. Both can be used in the same year.
• Elections to opt out of bonus depreciation must be attached to your tax return and generally cannot be revoked without IRS consent.

What is bonus depreciation?

Bonus depreciation is a tax incentive that accelerates depreciation by allowing businesses to deduct a substantial percentage of an eligible asset’s cost in the year it is placed into service. It’s designed to encourage business investment by providing immediate tax relief, reducing net earnings and tax liability in the acquisition year.

How it works and the phaseout

The Tax Cuts and Jobs Act raised bonus depreciation to 100% for qualifying property and broadened eligibility (including certain used property under conditions). The allowable percentage depends on when property is placed in service; the 100% rate is scheduled to phase down and end by the close of 2027. Rules and percentages can change, so consult a tax professional for current guidance.

What qualifies

Qualifying property generally includes:
* Tangible property subject to MACRS with a recovery period of 20 years or less
* Certain off-the-shelf computer software
* Water utility property
* Qualifying film, television, or live theatrical productions

Additional eligibility rules include restrictions on prior use, related-party acquisitions, and basis calculations tied to previous ownership or transfers (e.g., decedents, like-kind exchanges).

What does not qualify

Common exclusions include:
* Property primarily used in the trade or business of furnishing or selling electric energy, water, sewage disposal, gas or steam through certain systems
* Property in businesses with specified floor-plan financing indebtedness under some circumstances
* Certain qualified improvement property acquired after specified dates (subject to statutory adjustments and guidance)

Reporting, elections, and special situations

• Use IRS Form 4562 to claim bonus depreciation and other depreciation deductions.
• To compute the depreciable basis, subtract any credits or deductions allocated to the property from its basis. Special rules apply for property acquired in like-kind exchanges or involuntary conversions.
• A taxpayer may elect out of bonus depreciation for one or more classes of property by attaching a statement to the tax return. That election is generally irrevocable without IRS consent.
• If property claimed with bonus depreciation is later sold, any depreciation recapture rules may require recognizing some of the previously claimed deduction as ordinary income.

Bonus depreciation vs. Section 179

• Bonus depreciation: no statutory dollar limit, can exceed business income, generally applies automatically unless you elect out.
• Section 179: dollar and phaseout limits apply, deduction limited by taxable business income, and you can selectively apply it to specific assets or defer by choosing not to claim it.
• Both can be claimed in the same year, and choosing between them depends on business income, timing preferences, and long-term tax planning.

Vehicles

Passenger vehicles and certain other listed property qualify but are subject to statutory limits on the amount that can be expensed. For example, specific annual limits apply to passenger autos (the raw content cited a $20,200 limit for tax year 2025). Check current IRS guidance for up-to-date caps.

Why a business might opt out

Electing out of bonus depreciation may make sense if a business prefers to preserve depreciation deductions for future years (to offset anticipated future income), avoid creating net operating losses in the current year, or manage long-term tax liabilities. The decision can have complex consequences and should be made with tax planning in mind.

Bottom line

Bonus depreciation provides a powerful, immediate tax benefit for businesses acquiring qualifying property by accelerating deduction timing. It differs from Section 179 in limits and flexibility. Because eligibility rules, phaseout schedules, and limits can change and because elections are often irrevocable, businesses should review options with a qualified tax advisor before claiming or declining bonus depreciation.