The Bonus Depreciation Phase-Out Schedule
Bonus depreciation, as expanded by the Tax Cuts and Jobs Act (TCJA) of 2017, allowed businesses to deduct 100% of the cost of eligible property placed in service from late 2017 through 2022. This provision was designed to stimulate investment by offering a substantial upfront deduction rather than spreading it over the asset’s useful life.
However, the 100% write-off expired at the end of 2022. The phase-out schedule is as follows:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0% (bonus depreciation fully phased out)
This means that for property placed in service in 2026, only 20% of the cost will be eligible for bonus depreciation. For property placed in service in 2027 or later, no bonus depreciation will be available under current law.
What Qualifies for Bonus Depreciation?
Qualified property generally includes depreciable business assets with a recovery period of 20 years or less. This encompasses items such as:
- Machinery and equipment
- Furniture and fixtures
- Certain vehicles
- Computer software
- Qualified improvement property (QIP), such as interior upgrades to commercial buildings
Assets must not only be acquired but also placed in service within the relevant tax year to qualify for that year’s bonus depreciation percentage.
Planning Strategies for the Phase-Out
With the phase-out underway, proactive planning is more important than ever. Here are key strategies to consider:
- Accelerate Purchases and Placed-in-Service Dates
If you are planning significant capital expenditures, consider moving up your timeline so assets can be placed in service before the end of 2025 or 2026 to take advantage of the remaining bonus depreciation. Remember, the deduction is based on the year the asset is placed in service, not when it is purchased. - Consider Section 179 Expensing
As bonus depreciation phases out, Section 179 expensing becomes an even more important tool. Section 179 allows businesses to immediately expense certain asset purchases, though it comes with annual limits and phase-outs based on total asset purchases. For 2025, the maximum deduction is $1.25 million, subject to a spending cap and taxable income limitations. - Review Cost Segregation Opportunities
Cost segregation studies can help identify components of real estate that qualify for shorter depreciation periods and may still be eligible for bonus depreciation or Section 179 expensing. This can result in significant upfront deductions, even as bonus depreciation winds down. - Coordinate with Tax Professionals
The phase-out of bonus depreciation, combined with other expiring tax provisions, creates a more complex tax environment. Work closely with your tax advisor to ensure you are maximizing available deductions, timing asset acquisitions strategically, and complying with all IRS requirements.
What Happens After Bonus Depreciation Expires?
Once bonus depreciation phases out entirely in 2027, businesses will revert to regular depreciation methods for new asset purchases. This means deductions will be spread over the asset’s useful life—typically 3, 5, 7, 15, or 20 years, depending on the asset type. Section 179 will remain available, but with its own limitations.
Legislative Uncertainty: Will Bonus Depreciation Return?
There is ongoing discussion in Congress about restoring or extending 100% bonus depreciation, but as of now, no new law has been enacted. Businesses should plan according to current law, but stay alert for potential legislative changes that could alter the phase-out schedule or reinstate full expensing.
Conclusion
The phase-out of bonus depreciation marks a significant shift in tax planning for businesses and investors. By understanding the timeline, leveraging remaining opportunities, and coordinating with tax professionals, you can mitigate the impact of the phase-out and continue to optimize your tax position for 2026 and beyond.