Did you know that extending the Tax Cuts and Jobs Act (TCJA) is projected to reduce U.S. revenues by a staggering $4 trillion over the next decade? This massive shift emphasizes the importance of maximizing tax deductions, especially with bonus depreciation.
But, what exactly is bonus depreciation, and how can it benefit your business? In this article, you’ll explore how you, as a U.S. business owner, can use bonus depreciation to your advantage for the 2025 tax year.
What is Bonus Depreciation?
What Does Bonus Depreciation Mean for Your Business?
Bonus depreciation is a tax incentive that allows a taxpayer to immediately deduct a significant portion of the cost of eligible property in the year it’s placed in service, rather than depreciating it over time. This accelerated depreciation method can lower your taxable income right away, freeing up more cash for your business.
The Tax Cuts and Jobs Act of 2017 expanded this benefit, allowing 100% bonus depreciation through the end of tax years beginning in 2022, but the bonus depreciation percentage will phase down starting in 2025. So, if you’re planning to make substantial investments in qualifying assets, like tangible property with a recovery period of 20 years or less, consider taking action before the phase-out reduces this immediate deduction.
How Has Bonus Depreciation Changed for 2025?
In 2025, bonus depreciation begins to phase out, gradually reducing the percentage you can deduct in the first year an asset is placed in service. This phase-out schedule impacts business tax planning and is an important consideration for maximizing deductions while the benefit is still substantial.
Knowing when to purchase and place eligible property in service could help you claim bonus depreciation before the rules may further limit the deduction. Bonus depreciation deduction for qualified property acquired this year might be the last chance to claim the highest percentage available before the reduction continues through 2026.
Who Can Benefit Most from Bonus Depreciation?
Bonus depreciation is particularly valuable for businesses with high up-front costs or that regularly invest in depreciable assets. This includes companies that need new machinery, equipment, or business property to operate efficiently. Unlike the section 179 deduction, which has a maximum expense deduction limit, bonus depreciation allows for larger immediate deductions without income-based restrictions.
Whether you’re a small business or a large corporation, the ability to expense a greater portion of eligible property, including some used property and qualified improvement property, can improve cash flow and offset the cost of substantial asset investments.
Further Reading: Discover how bonuses are taxed
What Assets Qualify for Bonus Depreciation?
Which Assets Are Eligible for Bonus Depreciation?
Eligible assets for bonus depreciation include specific types of tangible property, such as machinery, computers, and listed property, as well as certain improvements made to real estate (such as HVAC systems and roofs). The IRS definition of qualified property generally covers assets with a recovery period of 20 years or less, whether they are new or used property acquired for business purposes.
Under the modified accelerated cost recovery system (MACRS), these assets can qualify for the additional first-year depreciation deduction. If you’re planning to make purchases, check the IRS guidelines to confirm which assets are eligible for bonus depreciation and to ensure you’re meeting the requirements for the deduction.
Can Real Estate Investors Use Bonus Depreciation?
Real estate investors can also benefit by taking bonus depreciation on qualified improvement property. Improvements such as roofing, HVAC, and security systems may qualify if the property is placed in service for business use. This tax strategy can provide a substantial depreciation allowance that offsets rental income, which can be especially useful for properties with long recovery periods under regular depreciation. Qualified leasehold improvements and certain structural modifications made to existing properties may also qualify for this additional first-year depreciation, so consult the IRS rules to maximize your deductions.
How to Report Qualified Assets on IRS Form 4562
To claim bonus depreciation, you’ll need to use IRS Form 4562 on your tax return to document each qualifying asset placed in service. This form provides space to detail the cost of eligible property, the class of property, and the depreciation method used.
Proper reporting of qualified property acquired during the tax year is essential for compliance and for accurately claiming both bonus depreciation and Section 179 deductions, if applicable. Keeping detailed records will ensure your tax return to claim bonus depreciation is in full compliance with IRS requirements.
Further Reading: Learn how to claim a depreciation deduction on your tax return
How Does Bonus Depreciation Compare with Section 179?
What Is the Difference Between Bonus Depreciation and Section 179?
While both bonus depreciation and Section 179 allow for immediate deductions, each has unique advantages and limits. Section 179 allows businesses to deduct up to a maximum section 179 expense deduction limit on eligible property each year, but it’s limited by the business’s taxable income.
In contrast, bonus depreciation allows you to deduct a percentage of the cost of eligible property in the first year, with no income restrictions. Section 179 may be better suited for smaller purchases or if you want to control your deduction based on current-year taxable income.
When Should You Choose Bonus Depreciation Over Section 179?
Bonus depreciation may be more advantageous when you’re purchasing large amounts of property or assets that exceed the Section 179 phase-out threshold, or if your total qualifying expenses are more than Section 179’s deduction cap.
It’s especially useful if your taxable income doesn’t limit the deduction, allowing for higher depreciation and expensing. If your asset investment includes used property or you’re placing high-cost assets into service, bonus depreciation could provide a greater benefit than Section 179.
Can You Combine Bonus Depreciation and Section 179 Deductions?
Yes, you can use both strategies in the same tax year, making it possible to maximize deductions. You might choose to use Section 179 for certain assets up to the section 179 limits and apply bonus depreciation to the remaining qualified property.
This allows for flexibility, so you can elect which assets to deduct immediately and which to depreciate over time. By strategically combining deductions, you optimize your tax benefits while staying within IRS rules, which may be particularly valuable in years with significant asset purchases.
Further Reading: Find out if your business vehicle qualifies for a Section 179 deduction
How to Maximize Your Deductions: Tax Planning Tips for 2025
Timing Purchases for Maximum Deductions
If you’re planning to buy business assets, consider the timing to maximize deductions. For example, the year for property placed in service is key—assets purchased and placed in service before year-end qualify for the current tax year’s depreciation rates, which is crucial as the bonus depreciation rules begin phasing out. Making purchases before year-end allows you to claim deductions in the same tax year and could secure a higher deduction percentage on your 2025 tax return to claim.
Understanding the Bonus Depreciation Phase-Out
Starting with tax years beginning in 2025, bonus depreciation percentages begin to decline each year. This phase-out affects the amount by which the cost of an asset can be deducted immediately. Staying aware of the bonus depreciation rules lets you plan for upcoming reductions, helping you maximize deductions while the higher rates still apply. By timing your purchases carefully, you may be able to lock in a higher deduction for property placed in service before the next phase-out reduction.
Utilizing Depreciation for Real Estate Investments
If you’re a real estate investor, bonus depreciation for qualified property can cover improvements like HVAC or roofing systems. These upgrades to section 179 property can be deducted quickly under bonus depreciation purposes if they meet the IRS criteria for property to include. Leveraging these deductions allows you to offset rental income effectively, so consider planning qualifying improvements before the phase-out impacts first-year deduction amounts.
Tracking and Reporting Assets for Tax Compliance
Detailed records of each property placed in service are essential. Accurately document the purchase price, description, and date for each asset, and categorize them correctly as section 179 property if applicable. These steps ensure compliance with section 179 rules and bonus depreciation requirements, allowing you to correctly file deductions. Using IRS Form 4562 for reporting helps claim eligible assets and keeps you compliant, which is important for maximizing the bonus depreciation deduction and protecting your return from audit risks.
Key Takeaways
- Boost Deductions: Bonus depreciation works to increase your immediate tax deductions.
- Maximize Savings: It allows faster write-offs for qualifying assets.
- Immediate Benefit: Claim larger deductions in the asset’s first year.
- Eligibility Matters: Not all assets qualify for bonus depreciation.
- Tax Savings Tool: Bonus depreciation works as a tool to reduce taxable income.
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