Under current law, bonus depreciation is limited to 80% of the cost of eligible property placed into service in 2023. As of the date of this publication, there is pending legislation (The Tax Relief for American Families and Workers Act of 2024) which includes a provision that would retroactively change bonus depreciation back to 100% as of January 1, 2023. The bill passed in the U.S. House of Representatives on January 31, 2024, and has yet to be voted on in the Senate. The future of the bill is unclear at this time.

To qualify for bonus depreciation, the property placed into service must have a useful life of 20 years or less. Some examples of qualifying property include qualified leasehold improvements, computer software, vehicles, and equipment.

Bonus Depreciation vs. Section 179

Bonus depreciation has some advantages over the Section 179 deduction, which is another method available for depreciating assets at an accelerated rate. While the Section 179 deduction is limited to $1,160,000 for 2023, there is no dollar cap on bonus depreciation.

For tax year 2023, bonus depreciation is 80% of the cost of the qualified assets placed into service. This means that if a taxpayer purchases (and places into service) a $100,000 qualified asset, they can deduct $80,000 of bonus depreciation on top of the regular depreciation, which equates to about 84% of the asset’s cost.

Bonus depreciation can also reduce taxable income below zero, meaning it can create losses to offset other income and even create a net operating loss. In contrast, Section 179 cannot be used to reduce income below $0.

Bonus Depreciation is Automatic

Bonus depreciation is automatic unless the taxpayer elects out. If the taxpayer elects out of using bonus depreciation on an asset, they must do so for all property with the same useful life placed into service during the year. For example, if a taxpayer purchases two 5-year assets and does not want to use bonus depreciation on one, they must elect out of using bonus depreciation on both, since both are 5-year property.

The Tax Cuts and Jobs Act of 2017 introduced a gradual phase out of bonus depreciation. Beginning in 2023, the deduction was reduced from 100% to 80% of qualifying expenses. After 2023, the deduction will proceed to decrease by increments of 20% each year until it is fully phased out in 2027. Changes such as this highlight the importance of utilizing tax planning in the coming years.

Please reach out to your tax advisor at KT to discuss your specific situation.