How Does 2024 Bonus Depreciation Work?

Bonus depreciation is an accelerated depreciation method allowing businesses to deduct a percentage of an asset’s cost in its first year of service. For assets placed in service during 2024, the bonus depreciation rate is 60%. This rate is a result of a planned phase-down schedule established by the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA initially allowed for 100% bonus depreciation, but the law included a gradual reduction of this benefit over several years, impacting a company’s tax liability.

The 2024 Bonus Depreciation Rate and Phase-Down Schedule

The bonus depreciation rate is determined by a phase-down schedule from the TCJA that began after 2022. The “placed in service” date, not the purchase date, determines which year’s rate applies. The schedule dictates a 20-percentage-point drop each year:

• 80% for property placed in service in 2023
• 60% for property placed in service in 2024
• 40% for property placed in service in 2025
• 20% for property placed in service in 2026

The benefit is scheduled to be completely phased out in 2027.

Legislative proposals could alter this schedule. The Tax Relief for American Families and Workers Act of 2024 proposes to retroactively restore 100% bonus depreciation for 2023, 2024, and 2025. As this is proposed legislation and not yet law, businesses must plan and file based on the existing 60% rate for 2024 while monitoring for changes.

Property Qualifying for Bonus Depreciation

To be eligible for bonus depreciation, an asset must be qualified property. The primary requirement is that the property must have a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS). This includes a wide range of tangible business assets, such as machinery, equipment, computers, off-the-shelf software, and furniture.

The TCJA expanded the definition of qualified property to include both new and used assets. The stipulation for used property is that it must be the taxpayer’s first time using the asset.

A specific category of eligible property is Qualified Improvement Property (QIP). QIP refers to any improvement made by the taxpayer to the interior portion of a nonresidential building, as long as the improvement is placed in service after the building was first placed in service. These improvements cannot be for the enlargement of the building, any elevator or escalator, or the internal structural framework.

Certain types of property are explicitly excluded from bonus depreciation. This includes land, which is not depreciable, and assets used predominantly outside of the United States.

How to Claim Bonus Depreciation

Claiming bonus depreciation is designed to be automatic for qualifying assets. The deduction is calculated and reported on IRS Form 4562, Depreciation and Amortization, which is filed with a business’s annual tax return. For an asset placed in service in 2024, 60% of its cost would be deducted as bonus depreciation, and the remaining 40% would then be depreciated over its regular MACRS recovery period.

A business may choose not to claim bonus depreciation by making an election to opt out. This is done on a class-by-class basis for property. For example, a business could elect out for its 5-year property but still claim bonus depreciation for its 7-year property. This election is made by attaching a statement to a timely filed tax return for the year the property was placed in service.

Interaction with Section 179 and State Tax Laws

Section 179 Expensing

Businesses can use both Section 179 and bonus depreciation, but they function differently. Section 179 allows a business to expense the full cost of qualifying assets up to a specific dollar limit, which is $1,220,000 for 2024. This deduction is phased out if the total cost of property placed in service exceeds a threshold of $3,050,000 for 2024. The Section 179 deduction cannot be used to create a business loss, as it is limited to the business’s taxable income.

Bonus depreciation has no annual dollar limit and is not limited by taxable income, meaning it can generate or increase a net operating loss (NOL). A common tax strategy is for a business to first apply the Section 179 deduction to eligible assets up to the annual limit. Then, bonus depreciation is applied to the remaining cost of those assets and to any assets acquired after the Section 179 spending cap was reached.

State Tax Law Conformity

The treatment of bonus depreciation varies significantly at the state level because not all states automatically conform to the federal tax code under IRC Section 168(k). This practice is often referred to as “decoupling,” where a state chooses not to adopt the federal provision.

Some states fully conform to the federal rules, while others partially conform, allowing a deduction at a different percentage. Many states do not conform at all, requiring businesses to add back the federal bonus depreciation amount to their state taxable income and calculate depreciation according to a separate state schedule.

This creates a difference between the federal and state basis of an asset, which must be tracked over the asset’s life. Businesses must verify the specific rules of the states where they file tax returns.