The phasedown of bonus depreciation under the Tax Cuts and Jobs Act continues to reduce the immediate tax benefit of capital asset acquisitions. In 2024, bonus depreciation stands at 60 percent, meaning businesses that place qualifying property in service this year can deduct 60 percent of the asset's cost in the first year, with the remaining 40 percent depreciated over the applicable recovery period. In 2025, the rate drops further to 40 percent. For businesses planning significant capital expenditures, this accelerating decline creates a time-sensitive planning opportunity.

The Phasedown Schedule

The TCJA originally provided 100 percent bonus depreciation for qualifying property placed in service after September 27, 2017, and before January 1, 2023. Beginning in 2023, the rate began its scheduled decline: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and zero in 2027.^[1] Each step in this phasedown shifts more of the depreciation deduction from the first year of the asset's life to subsequent years, reducing the present value of the tax benefit.

For property with longer production periods and certain aircraft, the phasedown is delayed by one year: 80 percent in 2024, 60 percent in 2025, and so on. Businesses acquiring these types of assets should account for the delayed schedule in their planning.

What Qualifies for Bonus Depreciation

Bonus depreciation applies to tangible personal property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System. This includes machinery, equipment, vehicles, furniture, and certain improvements to nonresidential real property known as qualified improvement property. Importantly, the TCJA expanded bonus depreciation to cover used property, not just new assets, provided the property has not previously been used by the acquiring taxpayer.^[2]

Qualified improvement property, which encompasses improvements to the interior of nonresidential buildings placed in service after the building was first placed in service, also qualifies for bonus depreciation following the technical correction enacted in the CARES Act. This category includes a wide range of building improvements such as HVAC systems, fire protection, and interior renovations, but excludes enlargements, elevators, escalators, and internal structural framework.

Strategic Timing Considerations

The difference between placing an asset in service in 2024 versus 2025 is significant. For a business acquiring a $1 million piece of equipment, a 2024 placement in service yields a first-year bonus depreciation deduction of $600,000, while a 2025 placement yields only $400,000. The $200,000 difference in first-year deductions, at a combined federal and state marginal rate of approximately 30 percent, translates to roughly $60,000 in additional cash flow in 2024.

For businesses that were already planning capital expenditures in early 2025, accelerating those purchases into late 2024 may produce substantial tax savings. However, the decision to accelerate should not be driven solely by tax considerations. A business should not acquire an asset it does not need merely to capture a higher depreciation deduction. The asset must serve a legitimate business purpose, and the timing should be evaluated in the context of the business's overall financial position and cash flow needs.

Section 179 as an Alternative

Section 179 expensing provides an alternative to bonus depreciation for certain smaller capital expenditures. For 2024, the Section 179 deduction limit is $1,220,000, with the phase-out beginning at $3,050,000 in total asset purchases. Unlike bonus depreciation, Section 179 has not been subject to phasedown, making it an increasingly important tool as bonus depreciation declines.^[3]

However, Section 179 has limitations that bonus depreciation does not share. The deduction cannot exceed the taxpayer's aggregate taxable income from active conduct of a trade or business, meaning it cannot create or increase a net operating loss. Bonus depreciation has no such limitation. For businesses acquiring assets that exceed the Section 179 dollar limit or that expect losses, bonus depreciation remains the more valuable tool.

Planning for the Remainder of the Phasedown

Businesses should develop a multi-year capital expenditure plan that accounts for the declining bonus depreciation percentages. Assets that produce the greatest tax benefit in the first year, such as short-lived equipment that would otherwise be depreciated over five or seven years, should generally be prioritized for acquisition in the current year. Longer-lived assets, where the value of accelerated depreciation is already spread over a longer recovery period, may be less sensitive to the timing of acquisition.

The interaction between bonus depreciation and other tax provisions also deserves attention. For businesses operating as S corporations or partnerships, the depreciation deduction flows through to the owners and must be absorbed against their individual tax obligations. Owners with sufficient income to absorb the deductions will benefit more from accelerated depreciation than owners who are already in loss positions. Coordinating the timing of asset acquisitions with the owners' individual tax situations can maximize the overall benefit to the business and its stakeholders.