Can I Claim 100 Bonus Depreciation in 2024?

Bonus depreciation allows a business to take an immediate first-year deduction on the cost of eligible business property, rather than writing it off over many years. This tax incentive is a planning tool for businesses making capital investments.

The Current State of Bonus Depreciation

The Tax Cuts and Jobs Act of 2017 (TCJA) established a schedule to gradually reduce the bonus depreciation rate from 100% in 2022. The rate was reduced to 80% for property placed in service during 2023 and continues to phase down to 60% for 2024, 40% for 2025, and 20% for 2026. In early 2024, a legislative proposal to restore 100% bonus depreciation failed to pass in the Senate. As a result, the TCJA’s original phase-down schedule remains in effect.

Qualified Property for Bonus Depreciation

To be eligible for bonus depreciation, an asset must fall into specific categories. The most common is Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less. This includes a wide range of business assets:

• Machinery
• Equipment
• Vehicles
• Furniture and fixtures

The TCJA also expanded eligibility to include used property, provided it was not acquired from a related party.

Other specific asset types that qualify include certain computer software, Qualified Improvement Property (QIP), and water utility property. QIP refers to certain interior, non-structural improvements made to a nonresidential building after it was first placed in service.

An asset’s eligibility is determined by the year it is “placed in service,” not the year it was purchased. The placed-in-service date is the date the property is ready and available for its specific use in the business. For example, an asset purchased at the end of one year but not installed until the next would be subject to the rules of the later year, which determines the applicable bonus depreciation percentage.

How to Claim Bonus Depreciation

Businesses report this deduction on Form 4562, Depreciation and Amortization. This form is filed with the business’s annual income tax return, such as a Form 1120 for corporations or a Schedule C for sole proprietors. The calculation is entered in Part II, designated for the Special Depreciation Allowance.

Claiming bonus depreciation is the default treatment for qualified property. However, a business can elect not to claim the deduction for a particular class of property. This election is made on a class-by-class basis, allowing a business to take bonus depreciation on five-year assets but elect out for seven-year assets.

To make this election, the business must attach a statement to its timely filed tax return for the year the property was placed in service. The statement must indicate that the business is electing out of the special allowance and identify the property class for which the election applies.

State Tax Considerations

Federal bonus depreciation rules do not automatically apply to state income taxes. States can decide whether to conform to or decouple from federal tax provisions.

Many states do not allow the same bonus depreciation deduction available on a federal return. In these states, businesses must add back the federal bonus depreciation amount when calculating state taxable income. The asset’s cost is then depreciated over its life according to that state’s specific rules.

Businesses must verify the rules for each state in which they have a filing obligation. Failing to account for this difference can lead to incorrect state tax payments and potential penalties.