What is the bonus depreciation phase-down schedule after 2022?

Bonus depreciation dropped from 100% to 80% in 2023, then 60% in 2024, 40% in 2025, 20% in 2026, and reaches zero in 2027 unless Congress acts. Businesses should plan capital expenditure timing to maximize available first-year deductions during the remaining phase-down period.

How does Section 179 complement bonus depreciation during the phase-down?

Section 179 allows businesses to immediately expense qualifying property up to an annual dollar limit regardless of the bonus depreciation percentage. As bonus depreciation declines, Section 179 becomes increasingly important for businesses seeking to maximize first-year deductions on capital equipment purchases.

Bonus Depreciation Phase-Down: What Business Owners Need to Plan For | Lynch Law

For the better part of five years, 100% first-year bonus depreciation was one of the most powerful tools in the business tax planning toolkit. Under the Tax Cuts and Jobs Act of 2017, businesses could immediately deduct the full cost of qualifying property in the year it was placed in service, effectively front-loading years of depreciation deductions into a single tax year. That era ended on January 1, 2023, when the phase-down schedule took effect. The first-year bonus depreciation rate is now 80% for 2023, and it will continue to decline each year until it reaches zero in 2027.^[1]

This post examines the phase-down schedule, the interplay between bonus depreciation and Section 179, and the planning strategies that capital-intensive businesses should consider as the deduction continues to shrink.

The Phase-Down Schedule

IRC § 168(k)(6) sets forth the following first-year depreciation percentages for qualified property placed in service during the specified calendar years:

For 2022 and earlier, the rate was 100%. For 2023, the rate is 80%. For 2024, it drops to 60%. In 2025, it will be 40%. In 2026, it decreases to 20%. And beginning in 2027, bonus depreciation will no longer be available at all, barring legislative action.^[2]

The phase-down applies based on the date the property is "placed in service" — meaning the date it is ready and available for its intended use — not the date it is purchased or paid for. This distinction matters for property with long lead times. Equipment ordered in 2023 but not delivered and operational until 2024 receives the 2024 rate (60%), not the 2023 rate (80%).

What Property Qualifies

Bonus depreciation under § 168(k) applies to property with a recovery period of 20 years or less (MACRS property), certain computer software, qualified film and television productions, and specified plants. Importantly, it also applies to used property acquired in an arm's-length transaction, a change made by the TCJA that significantly expanded the provision's reach. Real property generally does not qualify, although qualified improvement property (QIP) — interior improvements to nonresidential buildings — is eligible following the CARES Act correction in 2020.^[3]

Taxpayers may elect out of bonus depreciation on a class-by-class, year-by-year basis. This election can be strategically valuable — for example, a taxpayer with a net operating loss carryforward may prefer to forgo bonus depreciation and recover costs over the regular MACRS life, preserving the deductions for years when they will offset income at higher marginal rates.

Section 179 as a Complement

Section 179 expensing and bonus depreciation serve similar but not identical functions. Both allow immediate deduction of the cost of qualifying property, but they differ in important respects. The 2023 Section 179 expense limit is $1,160,000, with a dollar-for-dollar phase-out beginning when total property placed in service exceeds $2,890,000. Section 179 is limited to taxable income from the active conduct of a trade or business — it cannot create or increase a net operating loss. Section 179 is available for off-the-shelf computer software and certain improvements to nonresidential real property (roofs, HVAC, fire protection, and security systems), some of which may not qualify for bonus depreciation.^[4]

As bonus depreciation phases down, Section 179 becomes relatively more important. A business placing $1 million of equipment in service in 2024 can deduct $600,000 under bonus depreciation (60%) and the remaining $400,000 under Section 179, effectively achieving full first-year expensing — but only if it has sufficient business income to absorb the Section 179 deduction.

Planning Strategies

The declining bonus depreciation schedule creates a natural incentive to accelerate capital expenditures into earlier years. Every year of delay reduces the first-year deduction percentage by 20 points. For a business contemplating a $2 million equipment purchase, the difference between placing the property in service in December 2023 versus January 2024 is a $400,000 timing difference in deductions.

That said, accelerating purchases solely for tax reasons is not always sound business strategy. The tax tail should not wag the operational dog. The analysis should compare the present value of the accelerated deduction against the cost of earlier acquisition — including financing costs, opportunity cost of capital, and whether the equipment is actually needed in the current period. A 20% difference in first-year deduction is meaningful, but it does not change the total amount deducted over the property's life; it only changes when the deductions are taken.

For businesses that use fiscal years rather than calendar years, the phase-down schedule requires careful attention. Short tax years and mid-year conventions can affect the calculation, and the placed-in-service date determines which percentage applies regardless of when the fiscal year begins or ends.

Businesses should also consider the interaction with state tax law. Not all states conform to federal bonus depreciation. Mississippi, for example, generally follows federal depreciation rules for corporate income tax purposes, but business owners with operations in multiple states should model the state-level impact of accelerated federal deductions.^[5]

Legislative Outlook

There is bipartisan interest in restoring 100% bonus depreciation. The Tax Relief for American Families and Workers Act, which passed the House in January 2024 with broad support, would retroactively restore 100% bonus depreciation for property placed in service after December 31, 2022. As of this writing, the legislation's prospects in the Senate remain uncertain. Business owners should plan based on current law while remaining aware that retroactive restoration is possible.

Regardless of whether Congress acts, the phase-down creates planning opportunities that reward attention and proactive decision-making. Working with your tax advisor to model the impact of different placed-in-service dates is an essential part of capital budgeting for the next several years.

References

^[1] IRC § 168(k)(6)(A). The phase-down was enacted as part of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13201 (2017).
^[2] Id. The percentages apply to the adjusted basis of the property. The remaining basis is recovered under the applicable MACRS recovery period and method.
^[3] CARES Act, Pub. L. No. 116-136, § 2307 (2020) (correcting the drafting error that excluded qualified improvement property from 15-year recovery, thereby making it eligible for bonus depreciation).
^[4] IRC § 179(b), (d). The Section 179 limits are adjusted annually for inflation. Rev. Proc. 2022-38 sets the 2023 amounts.
^[5] Miss. Code Ann. § 27-7-17 (providing that Mississippi taxable income is computed using federal taxable income as a starting point, with certain modifications).