The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code, including the introduction of bonus depreciation. Bonus depreciation allows businesses to deduct a larger portion of the cost of certain assets in the year they are placed in service. This provision was originally scheduled to expire at the end of 2022, but the Consolidated Appropriations Act of 2023 extended it through 2025. In this article we will summarize the changes implemented in bonus depreciation. We will also provide a brief overview of the potential benefits of bonus depreciation and discuss some of the key considerations for businesses considering taking advantage of this provision.
The extension of bonus depreciation through 2025 is a significant development for businesses. This provision can provide a valuable tax savings for businesses that make significant investments in capital assets. However, it is important to note that bonus depreciation is not without its drawbacks, and businesses should carefully consider their individual circumstances before deciding whether to take advantage of this provision. For example, bonus depreciation may not be beneficial for businesses that are already fully utilizing their other depreciation deductions. Additionally, bonus depreciation can have a negative impact on a business’s book-to-tax ratio. However, despite these potential drawbacks, bonus depreciation can be a valuable tool for businesses that are looking to reduce their tax liability.
In addition to the extension of bonus depreciation through 2025, the Consolidated Appropriations Act of 2023 also made some important changes to the way that bonus depreciation is calculated. Under the new rules, the bonus depreciation percentage for new assets placed in service after December 31, 2022, will be 80%. This is down from the previous rate of 100%. Additionally, the new rules eliminate the phase-out of bonus depreciation for certain types of assets. These changes will make bonus depreciation even more valuable for businesses that are considering making significant investments in capital assets.
Understanding 2025 Bonus Depreciation
Bonus depreciation is a tax incentive designed to encourage businesses to invest in capital assets. Under this provision, businesses can deduct a certain percentage of the cost of qualifying assets from their taxable income in the year they are placed in service. The 2025 bonus depreciation rate is 100%, meaning that qualifying businesses can deduct the full cost of eligible assets in the year they are placed in service.
Bonus depreciation is available for a wide range of depreciable assets, including:
| Eligible Assets |
|---|
| Machinery |
| Equipment |
| Computers |
| Software |
| Vehicles |
To be eligible for bonus depreciation, the assets must be used in the taxpayer’s trade or business and have a recovery period of 20 years or less. The deduction is claimed on Form 4562, Depreciation and Amortization.
Benefits of Bonus Depreciation in 2025
Benefits of Using Bonus Depreciation
In 2025, you can deduct up to 100% of the cost of eligible equipment purchased and placed into service during the tax year. This means that you can deduct the entire cost of the equipment in the year it is purchased, rather than depreciating it over several years. This can save you a significant amount of money in taxes.
How to Use Bonus Depreciation
To use bonus depreciation, you must purchase eligible equipment and place it into service during the tax year. The equipment must be used in your business and have a recovery period of 20 years or less. You can deduct up to 100% of the cost of the equipment in the year it is purchased, up to the maximum amount allowed for the year.
| Year | Maximum Deduction |
|---|---|
| 2023 | $1.08 million |
| 2024 | $1.08 million |
| 2025 | 100% of the cost |
Bonus depreciation is a valuable tax break that can save you a significant amount of money. Be sure to take advantage of this tax break if you plan to purchase eligible equipment in 2025.
Eligibility for Bonus Depreciation in 2025
Bonus depreciation is a tax deduction that allows businesses to deduct the full cost of certain depreciable assets in the year they are placed in service. This can result in significant tax savings for businesses that make large capital investments.
The Tax Cuts and Jobs Act of 2017 (TCJA) modified the bonus depreciation rules for assets placed in service after September 27, 2017. Under the TCJA, the bonus depreciation rate is 100% for qualified property acquired and placed in service before January 1, 2023.
The bonus depreciation rate is scheduled to phase down to 80% for assets placed in service during 2023, 60% for assets placed in service during 2024, and 40% for assets placed in service during 2025.
Qualified Property
To be eligible for bonus depreciation, property must meet the following requirements:
* It must be depreciable property under the Internal Revenue Code Section 168.
* It must be acquired and placed in service after September 27, 2017.
* It must have a recovery period of 20 years or less.
* It must not be used predominantly outside the United States.
* It must not be certain other property, such as property used for entertainment, recreation, or amusement.
| Property Type | Recovery Period |
|---|---|
| Machinery | 7 years |
| Computer equipment | 5 years |
| Office furniture | 7 years |
| Vehicles | 5 years |
Calculation Methodology for Bonus Depreciation
1. Identify Eligible Assets
Bonus depreciation can be claimed for new or used depreciable assets that are placed in service during the tax year. Eligible assets include tangible property with a depreciation period of 20 years or less and certain improvements made to nonresidential real property.
2. Determine the Maximum Deductible Amount
The maximum amount of bonus depreciation that can be claimed is 100% of the eligible asset’s adjusted basis. The adjusted basis is typically the cost of the asset, minus any salvage value.
3. Calculate the Depreciation Deduction
The bonus depreciation deduction is calculated by multiplying the eligible asset’s adjusted basis by the applicable bonus depreciation percentage. The percentage varies depending on the type of asset and the year in which it was placed in service.
a. 2018 and 2019
| Year Placed in Service | Bonus Depreciation Percentage |
|---|---|
| 2018 | 50% |
| 2019 | 40% |
b. 2020
* 100% for eligible assets placed in service during 2020.
c. 2021-2022
* 80% for eligible assets placed in service during 2021-2022.
d. 2023-2024
* 60% for eligible assets placed in service during 2023-2024.
e. 2025 and Beyond
* 0% for eligible assets placed in service after 2024.
Impact on Business Taxes in 2025
Depreciation Timeframe
Under the bonus depreciation rules in effect until December 31, 2022, businesses could deduct 100% of the cost of qualified property in the year it was placed in service. However, for property acquired and placed in service after December 31, 2022, and before January 1, 2027, the bonus depreciation deduction will be phased down as follows:
Phase-Down of Bonus Depreciation
| Year | Bonus Depreciation Rate |
|---|---|
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
Tax Savings for Businesses
Bonus depreciation allows businesses to accelerate depreciation deductions, resulting in significant tax savings. For example, a business that purchases $100,000 worth of qualified property in 2025 will be able to deduct 40% of that cost ($40,000) in the first year of service. This deduction will reduce the business’s taxable income by $40,000, potentially saving the business thousands of dollars in taxes.
Budgetary Impact
The phase-down of bonus depreciation is estimated to reduce federal tax revenues by $112 billion over the next 10 years. This revenue loss will likely contribute to increased budget deficits and higher national debt.
Planning Considerations
Businesses that plan to purchase significant amounts of capital assets should consider the phase-down of bonus depreciation. Front-loading purchases into 2022, when the 100% bonus depreciation rate is still in effect, may result in substantial tax savings.
Planning for Bonus Depreciation Utilization
Identify Eligible Assets
Determine which assets can qualify for bonus depreciation in 2025. Generally, this includes new equipment, machinery, and vehicles placed in service during the tax year.
Maximize Acquisition Timing
Plan to acquire eligible assets before December 31, 2025, to fully utilize the bonus depreciation deduction.
Consider Financing Strategies
Explore financing options that align with your cash flow situation. Consider leasing or obtaining loans specifically tailored for asset acquisitions.
Evaluate Repair vs. Replacement
Analyze whether repairing existing assets or replacing them with new eligible assets would yield greater tax savings through bonus depreciation.
Accelerate Depreciation Deductions
Opt for a shorter depreciation period for eligible assets to accelerate the deduction and maximize the benefit of bonus depreciation.
Utilize Section 179 Expensing
In addition to bonus depreciation, consider utilizing Section 179 expensing for eligible assets with a cost of up to $25,000. This allows for immediate deduction of the asset’s full cost.
| Year | Bonus Depreciation Rate |
|---|---|
| 2023 | 100% |
| 2024 | 80% |
| 2025 | 100% |
| 2026 | 80% |
| 2027 | 60% |
Acquisition and Disposal Considerations
Timing of Acquisitions and Disposals
To maximize the benefits of bonus depreciation, consider acquiring qualifying assets before the end of the tax year. Disposals of qualified assets should be carefully timed to avoid prematurely triggering recapture of bonus depreciation.
Applicability to Used Property
Bonus depreciation is generally available for used property, subject to certain limitations and phase-outs. Used property is defined as property that has been placed in service by someone other than the taxpayer.
Improvements to Property
Improvements to existing property may qualify for bonus depreciation if the improvements increase the capacity, productivity, efficiency, or quality of the property. However, repairs and maintenance expenses do not qualify.
Eligible Depreciable Basis
The depreciable basis of an asset that qualifies for bonus depreciation is typically the cost of the asset. However, if an asset is acquired for more than its fair market value, the depreciable basis may be limited to the fair market value.
Disposition of Qualified Assets
Bonus depreciation is recaptured as ordinary income upon the disposition of a qualified asset. The amount of recapture depends on the length of time the asset was held.
Recapture Rates
| Holding Period | Recapture Rate |
|---|---|
| 0 – 1 year | 100% |
| 1 – 2 years | 66.67% |
| 2 – 3 years | 33.33% |
| 3 – 4 years | 0% |
It is important to consider the recapture implications when planning the disposition of qualified assets.
Special Rules for Certain Assets
Certain types of assets are subject to special rules under bonus depreciation, including listed property, luxury vehicles, and property used outside the United States.
Depreciation Recapture
Depreciation recapture occurs when an asset that has been depreciated is sold for a gain. The gain is subject to tax at the ordinary income rate, up to the amount of depreciation that has been taken on the asset. If the asset is sold for a loss, the loss is not deductible.
Bonus Depreciation
Bonus depreciation is a tax deduction that allows businesses to deduct a larger portion of the cost of certain assets in the year they are placed in service. This deduction can be taken for both new and used assets. The amount of bonus depreciation that can be taken varies depending on the type of asset and the year it is placed in service.
100% Bonus Depreciation
For assets placed in service after September 27, 2017, and before January 1, 2023, businesses can deduct 100% of the cost of the asset up to a maximum of $1.040 million.
80% Bonus Depreciation
For assets placed in service after December 31, 2022, and before January 1, 2027, businesses can deduct 80% of the cost of the asset up to a maximum of $1.040 million.
Additional Details
| Year | Bonus Depreciation Percentage | Maximum Deduction |
|---|---|---|
| 2018-2022 | 100% | $1.040 million |
| 2023-2026 | 80% | $1.040 million |
Bonus depreciation can be a valuable tax deduction for businesses. It can help businesses save money on taxes and free up cash flow. Businesses should consult with a tax advisor to determine if they are eligible for bonus depreciation and to maximize their tax savings.
Tax Accounting Implications in 2025
Impact on Business Cash Flows
In 2025, businesses can effectively reduce their tax liabilities by claiming higher depreciation deductions, leading to improved cash flow. This increased deduction can offset taxable income, resulting in lower tax payments and potentially freeing up capital for other investments.
Depreciation Deduction Limit
The current depreciation deduction limit of 100% for qualified property placed in service after September 27, 2017, is set to expire in 2023, dropping to 25% in 2024. However, the Tax Cuts & Jobs Act (TCJA) included a provision to provide a 9-year bonus depreciation period for property placed in service after December 31, 2022, and before January 1, 2027.
Qualifying Property
Eligible property must be acquired and placed in service by the business before 2027. This includes new and used equipment used in a trade or business, excluding personal use assets and land.
Recapture Rule
Bonus depreciation provides accelerated depreciation deductions, but it comes with a recapture rule. If the property that was eligible for bonus depreciation is sold or disposed of before the end of its useful life, a portion of the previously claimed bonus depreciation is recaptured and included as taxable income.
Exceptions to Recapture Rule
There are exceptions to the recapture rule, such as when the property is replaced within 4 years with new qualified property and the business continues to use the property for business purposes.
Accounting Treatment
Under the modified accelerated cost recovery system (MACRS), bonus depreciation is typically recorded as a reduction of the asset’s basis. The depreciation expense is calculated using the applicable MACRS recovery period.
Impact on Financial Statements
Increased depreciation deductions can positively impact a company’s financial statements by reducing net income and, consequently, income tax expense. This can lead to improved key financial ratios, such as return on assets (ROA) and return on equity (ROE).
Planning Considerations
Businesses should evaluate their capital expenditure plans to maximize the benefits of bonus depreciation, considering the property’s useful life and the potential recapture implications. It’s advisable to consult with tax professionals to determine the best course of action for their specific situation.
Depreciation Deduction Limits and Useful Lives
| Property | Useful Life | Deduction Limit |
|---|---|---|
| Computer | 5 years | 100% |
| Machinery | 7 years | 100% |
| Office Furniture | 10 years | 100% |
Industry-Specific Applications of Bonus Depreciation
Commercial Real Estate
Bonus depreciation can significantly reduce the taxable income of commercial real estate investors by allowing them to deduct 100% of the cost of qualifying property in the year it’s placed in service.
Manufacturing
Manufacturers can use bonus depreciation to accelerate deductions for new machinery and equipment, reducing their tax burden and improving their cash flow.
Technology
Technology companies can leverage bonus depreciation to deduct the cost of servers, software, and other hardware, lowering their taxable income and stimulating innovation.
Healthcare
Healthcare providers benefit from bonus depreciation by deducting the cost of medical equipment, including imaging systems, surgical instruments, and patient monitoring devices.
Energy
Bonus depreciation can boost the profitability of energy projects by allowing companies to deduct the cost of renewable energy equipment, such as solar panels, wind turbines, and electric vehicles.
Transportation
Transportation companies can reduce their tax liability by deducting the cost of vehicles, such as trucks, buses, and airplanes, using bonus depreciation.
Construction
Bonus depreciation provides tax savings for construction companies by enabling them to deduct the cost of equipment, such as cranes, excavators, and scaffolding.
Retail
Retailers can use bonus depreciation to deduct the cost of store fixtures, displays, and equipment, reducing their taxable income and enhancing their financial performance.
Education
Educational institutions can leverage bonus depreciation to deduct the cost of educational technology, equipment, and facilities, supporting their mission to provide quality education.
Nonprofit Organizations
Nonprofit organizations can utilize bonus depreciation to deduct the cost of qualified property used in their charitable activities, maximizing their impact in the community.
| Industry | Qualifying Assets |
|---|---|
| Commercial Real Estate | buildings |
| Manufacturing | machinery, equipment |
| Technology | computers, servers, software |
| Healthcare | medical equipment, facilities |
| Energy | renewable energy systems |
2025 Bonus Depreciation
The 2025 bonus depreciation allowance encourages businesses to invest in capital assets by allowing them to deduct a larger portion of the cost of those assets in the year they are placed in service.
For property placed in service after December 31, 2017, and before January 1, 2023, the bonus depreciation percentage is 100%. This means that businesses can deduct the entire cost of eligible property in the year it is placed in service.
For property placed in service after December 31, 2022, and before January 1, 2027, the bonus depreciation percentage is 80%. This means that businesses can deduct 80% of the cost of eligible property in the year it is placed in service.
After December 31, 2026, bonus depreciation will no longer be available.
People Also Ask About 2025 Bonus Depreciation
What is the difference between bonus depreciation and Section 179 expensing?
Bonus depreciation is a deduction that allows businesses to deduct a larger portion of the cost of capital assets in the year they are placed in service. Section 179 expensing is a deduction that allows businesses to deduct the entire cost of certain capital assets up to a certain dollar limit in the year they are placed in service.
What is eligible for bonus depreciation?
Property that is eligible for bonus depreciation includes tangible personal property and certain real property improvements. This includes equipment, machinery, vehicles, and buildings.
