100% Bonus Depreciation Phaseout Continues
The phaseout of 100% bonus depreciation is ongoing, reducing the amount businesses can deduct upfront for qualifying purchases. For the 2024 tax year, companies can no longer claim a full immediate deduction, making timing and eligibility more critical for business owners planning equipment and technology investments.
Bonus depreciation allows businesses to deduct a large portion of the cost of qualified property in the year it is placed in service rather than spreading deductions over several years. The Tax Cuts and Jobs Act temporarily expanded this provision, allowing full expensing for eligible assets placed in service between late 2017 and the end of 2022.
That provision is now being phased out under current tax law. In 2024, businesses may deduct 60 percent of the cost of qualifying assets in the first year. The remaining balance must be depreciated in accordance with standard rules. The percentage will continue to decline in future years unless Congress acts to change the schedule.
The rules apply to assets placed in service during the tax year, not simply purchased. Property must be ready and available for its intended business use before the end of the year to qualify for the higher deduction.
Eligible assets generally include fixed asset purchases used in active business operations. New and used property may qualify, provided the asset was not previously used by the taxpayer in a trade or business. Common examples include manufacturing equipment, certain types of computer software, and other tangible assets used in day-to-day operations.
To qualify, the asset must meet the definition of qualified property under federal tax rules and be used for business purposes more than 50 percent of the time. Assets acquired from a related party are excluded, and real property such as buildings and land does not qualify for bonus depreciation.
Businesses must also consider acquisition requirements, including ownership rules. Leased property is typically not eligible, and documentation supporting the cost of the property and its service date is essential if the deduction is subject to review.
After applying the first-year depreciation deduction, the remaining value of the asset is depreciated over time using the Modified Accelerated Cost Recovery System. This system assigns recovery periods based on asset type and determines how deductions are spread across future years.
While bonus depreciation accelerates deductions, it does not increase the total amount that can be depreciated over time. Instead, it shifts deductions forward, which can affect taxable income and tax liabilities in later years. Businesses should assess how this timing change aligns with their broader tax planning strategies, particularly if income levels fluctuate.
For many business owners, bonus depreciation has been a tool to improve cash flow by reducing near-term tax bills. As the percentage declines, the immediate tax savings from asset purchases will be smaller, even though the overall depreciation benefit remains.
Companies considering capital investments may weigh whether to accelerate purchases to take advantage of higher deductions or spread investments over time. Decisions should be based on operational needs and long-term planning rather than tax benefits alone.
The Internal Revenue Service continues to publish updated guidance each year explaining how depreciation rules apply, including detailed examples and definitions that businesses can use to confirm eligibility.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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