The Legislative History of Bonus Depreciation

Bonus depreciation is a tax incentive allowing businesses to deduct a percentage of an asset’s cost in the year of purchase. This immediate deduction lowers a company’s taxable income, providing a financial benefit sooner than traditional depreciation methods, which spread the deduction over the asset’s useful life. The history of this policy is linked to the government’s efforts to influence economic activity. Lawmakers have frequently adjusted the rules and rates of bonus depreciation in response to changing economic conditions, making it a tool for stimulating business investment.

The Genesis of Bonus Depreciation

Bonus depreciation was first introduced as part of the Job Creation and Worker Assistance Act of 2002 (JCWAA). This legislation was enacted in response to the economic slowdown following the events of September 11, 2001, with the goal of encouraging businesses to invest in new assets. The initial provision allowed businesses to take an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualified property.

To be eligible for this 30% bonus, the property had to be new, meaning its original use began with the taxpayer. The asset also needed to have a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS), which includes assets like machinery, equipment, and computer software. The property must have been acquired after September 10, 2001, and placed in service before a specific cutoff date, establishing it as a temporary stimulus measure.

The Era of Economic Stimulus Adjustments

The period following the 2008 financial crisis saw Congress turn to bonus depreciation as a primary tool for economic stimulus. The Economic Stimulus Act of 2008 increased the bonus depreciation rate to 50% for qualifying property placed in service during that year. This was a direct response to the deepening recession, aimed at encouraging immediate business spending on capital assets. The American Recovery and Reinvestment Act of 2009 (ARRA) extended this 50% rate through 2009.

As economic uncertainty persisted, the legislative adjustments continued. The Small Business Jobs Act of 2010 first extended the 50% rate through 2010. Subsequently, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased bonus depreciation to 100% for assets acquired and placed in service between September 9, 2010, and December 31, 2011. After the 100% rate expired, the American Taxpayer Relief Act of 2012 (ATRA) reverted the rate to 50% and extended it through 2013.

The PATH Act and the First Scheduled Phase-Down

A policy shift occurred with the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015. Unlike the previous series of last-minute extensions, the PATH Act established a long-term, predictable schedule for bonus depreciation to provide businesses with greater certainty for capital planning. The PATH Act extended 50% bonus depreciation for property placed in service from 2015 through 2017. It also introduced the first-ever scheduled phase-down of the benefit, with the rate set to decrease to 40% for property placed in service in 2018, and then to 30% for property placed in service in 2019.

The Tax Cuts and Jobs Act (TCJA) Overhaul

The Tax Cuts and Jobs Act of 2017 (TCJA) represented a significant overhaul of bonus depreciation. In a reversal of the phase-down initiated by the PATH Act, the TCJA increased the bonus depreciation rate to 100% for qualified property acquired and placed in service after September 27, 2017. A key change was the expansion of qualified property to include used assets. Prior to this act, only new property was eligible, but the TCJA stipulated that used property could now qualify, provided the taxpayer had not previously used the asset and did not acquire it from a related party. The law specified that eligible property generally includes assets with a MACRS recovery period of 20 years or less, computer software, and certain film, television, and live theatrical productions.

The Current Phase-Down and Legislative Outlook

The Tax Cuts and Jobs Act of 2017 included a built-in, long-term phase-down of the 100% bonus depreciation rate. This reduction began as scheduled, with the rate dropping from 100% for property placed in service through 2022 to 80% for property placed in service in 2023. The scheduled decreases continue annually, with the rate set at 60% for 2024, 40% for 2025, and 20% for 2026, before reaching 0% in 2027. This gradual phase-out provides a predictable timeline for businesses planning future capital investments. To qualify for a specific year’s rate, the asset must be placed in service before the end of that calendar year; for example, to claim 40% bonus depreciation, an eligible asset must be placed in service by December 31, 2025.

The future of bonus depreciation remains a topic of legislative discussion. Proposals to extend or enhance the benefit, such as restoring the 100% rate, frequently emerge in Congress. The debate over the long-term role of bonus depreciation in federal tax policy is likely to persist.