What Is the Status of the Extension of Bonus Depreciation?

Bonus depreciation is a federal tax incentive allowing businesses to deduct a significant portion of the purchase price of eligible assets in the year they are placed in service. This mechanism for accelerated depreciation was expanded under the Tax Cuts and Jobs Act of 2017 (TCJA), which permitted a 100% first-year deduction for qualified property.

The enhanced deduction, however, was not permanent. It is currently subject to a scheduled phase-out that began in 2023, reducing its value to businesses over time. While there have been legislative efforts to extend the more favorable terms, the phase-out continues.

The Current Bonus Depreciation Phase-Out Schedule

Under the framework established by the Tax Cuts and Jobs Act of 2017, the 100% bonus depreciation allowance for qualified property began a multi-year phase-out. For most qualified property placed in service after September 27, 2017, and before January 1, 2023, businesses could deduct the full cost in the first year.

The scheduled reduction decreases the allowable first-year deduction by 20 percentage points each year. The rate dropped to 80% for property placed in service in 2023 and to 60% in 2024. For assets placed in service in 2025, the bonus depreciation rate is 40%. The phase-out will continue with a 20% rate in 2026, before the provision is eliminated entirely for property placed in service in 2027 and beyond.

This phase-out schedule has a slightly different timeline for certain specific types of assets. Property with longer production periods and certain aircraft are granted a one-year delay in the phase-out schedule. For this specific category of property, the 100% deduction was available through 2023, and the subsequent percentage reductions are similarly pushed back by one year, with the 20% rate applying in 2027.

Recent Legislative Efforts to Extend Bonus Depreciation

The scheduled phase-out of 100% bonus depreciation prompted a legislative effort in 2024 aimed at its restoration. The Tax Relief for American Families and Workers Act of 2024, which passed the House of Representatives, proposed to retroactively extend the 100% bonus depreciation rate for property placed in service from 2023 through 2025.

However, despite passing the House, the bill stalled in the Senate and was not enacted into law. As a result, the original phase-out schedule established by the TCJA remains in effect.

Qualified Property for Bonus Depreciation

To be eligible for bonus depreciation under Internal Revenue Code Section 168, an asset must fall into a specific category of “qualified property.” A primary category is Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less. This includes assets like machinery, equipment, vehicles, and office furniture.

In addition to tangible property, certain other asset types also qualify. Off-the-shelf computer software is eligible for the deduction. Water utility property and qualified improvement property (QIP) are also included. 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 itself was first placed in service.

The TCJA expanded qualified property to include not just new, but also used assets. For used property to qualify, it must not have been used by the taxpayer or a predecessor at any time prior to its acquisition.

The law also specifies that the taxpayer must have acquired the property after September 27, 2017, and placed it in service during the relevant eligibility period. Certain types of property are explicitly excluded, such as property used by regulated public utilities and property used in certain real property trades or businesses that have elected out of interest deduction limitations.

Claiming Bonus Depreciation and State Tax Considerations

Claiming bonus depreciation is the default treatment for qualified property placed in service during the tax year. Taxpayers report this deduction on IRS Form 4562, Depreciation and Amortization. To complete the form, a business needs specific information for each asset, including its total cost, a description of the property, and the date it was placed in service.

While bonus depreciation is automatic for eligible assets, a taxpayer can choose to elect out of the provision. This election is made on a timely filed federal tax return for the year the property is placed in service. The election out is made by class of property, meaning a business could, for example, elect out for all of its 5-year property while still claiming bonus depreciation for its 7-year property placed in service in the same year. A statement must be attached to the return indicating the class of property for which the election is being made.

A compliance challenge arises from how states treat bonus depreciation. Many states do not conform to the federal rules. This non-conformity means that a business might claim a large depreciation deduction on its federal return, but be required to calculate depreciation differently for its state income tax return, often using a much slower schedule.

This discrepancy creates a difference between federal and state taxable income that must be tracked and reconciled each year. Businesses in non-conforming states must prepare a separate depreciation schedule for state purposes, often requiring an addition to state income for the amount of the federal bonus deduction and then a separate subtraction for the state-allowed depreciation amount. This adds complexity to tax preparation and can result in a higher state tax liability in the year an asset is acquired.