Bonus Depreciation
A tax incentive allowing businesses to immediately deduct a large percentage of the cost of qualifying assets in the first year. The rate was 100% through 2022 and phases down to 20% in 2026.
Bonus depreciation (formally, the additional first-year depreciation deduction under IRC Section 168(k)) allows businesses to immediately expense a percentage of the cost of new and used qualifying property in the year it is placed in service. Unlike Section 179, bonus depreciation is not capped at business income and can create a net operating loss.
The bonus depreciation rate has been phasing down since 2022: 100% for property placed in service before January 1, 2023; 80% in 2023; 60% in 2024; 40% in 2025; 20% in 2026; and 0% thereafter (unless Congress extends it). Qualifying property generally includes most tangible personal property with a recovery period of 20 years or less, computer software, and qualified improvement property.
Bonus depreciation is applied after Section 179 expensing and is calculated on the remaining cost basis of qualifying assets. Because bonus depreciation has no income limitation, a business that makes large capital purchases can generate a loss that offsets other income. However, taxpayers must weigh the immediate benefit against potential depreciation recapture upon sale of the asset and the loss of future MACRS deductions.
Related Terms
MACRS Depreciation
Modified Accelerated Cost Recovery System — the standard IRS method for depreciating business assets, using predetermined recovery periods and front-loaded deduction schedules.
Section 179 Deduction
An IRS provision allowing businesses to immediately deduct the full cost of qualifying equipment and property in the year it is placed in service, rather than depreciating it over time. The 2025 limit is $1,250,000.
Depreciation
A tax deduction that spreads the cost of a business asset over its useful life. Section 179 and bonus depreciation may allow full first-year expensing for qualifying assets.
Business Expenses
Costs incurred in running a business that are deductible on your tax return if they are ordinary (common in your industry) and necessary (helpful and appropriate for your trade).