What Is the Special Depreciation Allowance Deduction?

The special depreciation allowance deduction is a tax benefit designed to encourage investment by enabling businesses to recover the costs of qualifying assets more quickly. This deduction can result in substantial tax savings, making it an appealing option for companies aiming to optimize their financial strategies.

Qualifying Assets

The special depreciation allowance applies to specific assets, primarily new and unused tangible property with a determinable useful life, such as machinery, equipment, and certain vehicles. Under Internal Revenue Code (IRC) Section 168(k), these assets must be acquired and placed in service between September 27, 2017, and January 1, 2027, to qualify. The Tax Cuts and Jobs Act (TCJA) of 2017 expanded eligibility to include used property, provided it meets acquisition criteria and wasn’t previously used by the taxpayer.

Certain property types are explicitly included or excluded. Qualified improvement property, such as interior improvements to nonresidential real property, qualifies, while buildings and structural components typically do not. Assets must be placed in service within the tax year for which the deduction is claimed, requiring strategic planning and thorough record-keeping.

Deduction Rules

This deduction allows businesses to write off a significant percentage of an asset’s cost in the year it is placed in service. Starting in the 2024 tax year, 80% of the cost of qualifying assets can be deducted immediately, decreasing to 60% in 2025 and phasing out unless legislative changes occur. To qualify, the asset must be used predominantly for business purposes—over 50% of its use must involve business activities. Failing to meet this threshold may require recapturing the deduction by adding the previously deducted amount back into taxable income.

While the deduction can substantially reduce taxable income, businesses should consider its interaction with other tax provisions, such as the Section 179 deduction, which allows for expensing certain asset purchases up to a specified limit.

Non-Qualifying Situations

Certain conditions may disqualify assets from benefiting from this deduction. Assets acquired from related parties, as defined in IRC Section 267, are excluded to ensure arm’s-length transactions. Assets used predominantly for personal purposes are also ineligible. Proper documentation and usage logs can help substantiate the business-use percentage.

Leased assets generally do not qualify since the lessee benefits from the asset’s use. However, exceptions may apply if the lease transfers significant ownership benefits to the lessee.

Coordination with Other Depreciation Methods

The special depreciation allowance must be coordinated with other depreciation methods, such as the Modified Accelerated Cost Recovery System (MACRS) and the straight-line method. MACRS allows for accelerated depreciation over an asset’s useful life, which can be paired with the special depreciation allowance to maximize tax benefits. Businesses can apply the special depreciation allowance first to reduce the asset’s basis before using MACRS for the remaining cost.

Internationally, businesses adhering to International Financial Reporting Standards (IFRS) may encounter the straight-line method, which spreads the cost evenly over the asset’s useful life and provides a predictable expense profile. Proper documentation ensures compliance with both domestic and international regulations.

Documentation Essentials

Comprehensive documentation of asset acquisition and usage is essential for compliance with the special depreciation allowance. Businesses should maintain detailed records of the purchase price, acquisition date, and specific usage of each asset. These records must align with IRS requirements, particularly for dual-purpose assets, where usage logs can demonstrate compliance with the business-use requirement.

Retaining purchase agreements, invoices, and relevant contracts establishes an asset’s eligibility. A systematic approach to documentation facilitates coordination with other depreciation methods, ensuring businesses can accurately track asset basis and apply the appropriate depreciation schedules.