The bonus depreciation under Section 168(k) of the Internal Revenue Code (IRC) allows businesses to accelerate the depreciation deductions on certain assets used in the trade or business.

Generally, when a company purchases fixed assets with a useful life beyond one year, it must capitalize and depreciate them under the Modified Accelerated Cost Recovery System (MACRS).

IRC Section 168(k) was first added to the tax code in 2002, and it was amended under the Tax Cuts and Jobs Act (TCJA) in 2017. In order to claim bonus depreciation, the depreciable property must meet the following requirements:

  • The depreciable property must be of a specified type;
  • The original use of the property must commence with the taxpayer, or the used property must meet the acquisition requirements under Section 168(k)(2)(E)(ii);
  • The property must be placed into service by the taxpayer during the year; and
  • The taxpayer acquired the property after September 27, 2017.
What is Qualified Property Under Section 168(k)

The allowance for bonus depreciation is only eligible for the first year the property is placed into service. Qualified property for bonus depreciation includes:

  • MACRS property with a recovery period of 20 years or less;
  • Off-the-shelf computer software
  • MACRS 25-year water utility property
  • Intangible assets related to films and TV shows
What are the Dollar Limitations?

Bonus depreciation is expressed as a percentage of the assets depreciable basis which can be expensed. Bonus depreciation is allowed even if the company is in a net loss position. In contrast, a company cannot claim a Section 179 expense to create a net operating loss (NOL).

The applicable percentage for bonus depreciation is available for the following tax years:

  • Year 2017: 100%
  • Year 2018: 100%
  • Year 2019: 100%
  • Year 2020: 100%
  • Year 2021: 100%
  • Year 2022: 100%
  • Year 2023: 80%
  • Year 2024: 60%
  • Year 2025: 40%
  • Year 2026: 20%
  • Year 2027: 0%
Example Bonus Depreciation Deduction

Company Alpha Inc., a Florida corporation, is a Florida-based manufacturer. On January 1, 2022, Company Alpha purchased a piece of manufacturing equipment for $80,000. The company estimates the machine will last five years and have a salvage value of zero.

The company has several depreciation options. It could depreciate the property over five years using the declining balance method under MACRS or depreciate the entire asset in year 1 using either the Section 179 deduction or bonus depreciation deduction.

The company elects to claim the 100% bonus depreciation deduction for the 2022 tax year. To do so, it completes Part II of IRS Form 4562 (Depreciation and Amortization) to claim the $80,000 special depreciation allowance.

Other Depreciation Methods

Other available U.S. federal tax depreciation methods include the following:

  • Straight-line depreciation method under GDS or ADS
  • 200% Declining Balance Method under MACRS
  • 150% Declining Balance Method under MACRS
  • Section 179 Expense
Other Information

Taxpayers seeking more information on bonus depreciation can visit the IRS website and review IRS Publication 946 (How to Depreciate Property).