Tax

What is Bonus Depreciation?

Bonus depreciation allows businesses to deduct the full cost of qualifying property in the year it's placed in service. Learn how bonus depreciation works, which assets qualify, recent law changes, and how it compares to Section 179.

What Is Bonus Depreciation?

Bonus depreciation is a tax incentive created by Congress to encourage business investment by allowing companies to deduct a large portion — potentially 100% — of qualifying property costs in the year the property is placed in service, rather than spreading deductions over the asset's recovery period. Schema DefinedTerm: Bonus depreciation — a temporary tax incentive that permits businesses to claim an additional first-year depreciation deduction equal to a specified percentage of the cost of qualifying property, regardless of the property's normal recovery period under MACRS. The policy was designed as an economic stimulus tool. By allowing faster deductions, businesses pay less tax in the year of purchase, improving cash flow and incentivizing equipment upgrades and capital investment.

How Bonus Depreciation Works

Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was set at 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023. After 2022, the bonus depreciation rate began decreasing by 20 percentage points annually: | Year | Bonus Depreciation Rate | |---|---| | 2023 | 80% | | 2024 | 60% | | 2025 | 40% | | 2026 | 20% | | 2027+ | 0% (unless extended) | Note: This phase-down schedule has been modified by subsequent legislation in recent years. Always verify current rates with the IRS or a tax professional before planning large purchases. If you buy $100,000 of qualifying equipment in 2024 (60% bonus year): - Regular MACRS depreciation (5-year property, half-year convention): ~$20,000 in Year 1 - Bonus depreciation (60% × $100,000): $60,000 additional deduction - Total Year 1 deduction: ~$80,000 - Remaining $20,000 depreciated under normal MACRS schedule The bonus depreciation is taken after any Section 179 deduction, on the remaining unadjusted basis.

Qualifying Property

Bonus depreciation applies to qualified property which generally means: - Tangible personal property with a recovery period of 20 years or less (equipment, vehicles, computers, furniture) - Qualified improvement property (interior improvements to non-residential property placed in service after the building was first placed in service) - Qualified film, television, and live theatrical productions - Certain qualified community property Key requirements: 1. The property must be used in a trade or business 2. The original use must begin with the taxpayer (or the property must be first available for use in the US) 3. Property must have a determinable useful life of at least one year

Freelancer Example: Bonus Depreciation in Action

Scenario: Marcus, a freelance videographer, buys a new RED camera system for $18,000 in January 2024. This is 5-year property. Using 60% bonus depreciation for 2024: - Bonus depreciation: $18,000 × 60% = $10,800 - Remaining basis: $18,000 − $10,800 = $7,200 - Regular MACRS Year 1 deduction on remaining $7,200: ~$1,440 - Total Year 1 deduction: ~$12,240 Compare to normal MACRS without bonus: Marcus would only deduct ~$3,600 in Year 1. Bonus depreciation nearly triples his first-year deduction, significantly reducing his tax liability and improving his cash flow to pay for the equipment.

Bonus Depreciation vs. Section 179

| Feature | Bonus Depreciation | Section 179 | |---|---|---| | Deduction limit | 60% of cost (2024) | $1.16M (2024) | | Income limit | No taxable income limit | Limited by taxable income | | Property restrictions | New or used with certain requirements | Similar restrictions | | Permanent or temporary? | Currently phasing down | Permanent | | State conformity | Not all states conform | Varies by state |

How Eonebill Helps

Making major equipment purchases? Eonebill's expense tracking helps you model the tax impact of bonus depreciation vs. MACRS vs. Section 179 — so you can plan purchases strategically at year-end and maximize your deductions. Consult your CPA for your specific situation.

Related Terms

- MACRS — the standard depreciation system bonus depreciation accelerates - Section 179 — another first-year expensing option - Depreciation — the underlying concept

Related Templates

- Equipment Purchase Tax Impact Calculator - Year-End Tax Planning Template

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Frequently Asked Questions

What is bonus depreciation?

Bonus depreciation is a tax incentive that allows businesses to deduct 100% of the cost of qualifying property in the year it's placed in service — instead of depreciating it over several years under MACRS. It was introduced in 2002 and has been extended, modified, and expanded multiple times since. The current bonus depreciation rate for qualified property is 60% (phasing down by 20% per year through 2026) as of recent tax law.

What property qualifies for bonus depreciation?

Qualified property includes: new tangible personal property with a recovery period of 20 years or less (equipment, vehicles, computers), certain qualified film, television, and live theatrical productions, qualified improvement property (QIP), and property used in a qualified trade or business. Used property can also qualify under certain circumstances. Land does not qualify.

How does bonus depreciation compare to Section 179?

Both Section 179 and bonus depreciation provide accelerated deductions. Key differences: Section 179 has property eligibility restrictions, annual caps ($1.16M for 2024), and limits based on taxable income. Bonus depreciation has no taxable income limit and applies to more property types, but it is temporary (phasing down annually) and allows only a percentage of cost in early years (currently 60%, stepping down to 0% by 2027 unless Congress extends it).

Can I use both bonus depreciation and Section 179 on the same property?

Yes — in some cases you can use both on the same property, but you cannot double-dip the same expense. Typically you would apply Section 179 first (up to its limit) and then use bonus depreciation on the remaining basis. However, the interaction is complex and the order of application matters. Work with a CPA to optimize your deduction strategy.

What is the current bonus depreciation schedule?

Under current law, bonus depreciation rates are: 60% (2023), 40% (2024), 20% (2025), 0% (2026 and beyond, unless Congress acts). However, this schedule has been modified multiple times and may change. Always check the most current IRS guidance or work with a tax professional before making large equipment purchases based on bonus depreciation assumptions.