The Status Of Bonus Depreciation In 2025

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about some of the most sweeping tax reforms in decades. Among its many provisions, the enhancement of bonus depreciation stands out as a powerful tool for businesses.

Bonus depreciation (Section 168 (k) of the Internal Revenue Code) allows companies and rental property owners to immediately deduct a significant percentage of the cost of eligible assets, offering substantial taxable income savings. However, bonus depreciation rules are changing as this provision is set to phase out by 2026, with full expiration scheduled for 2027.

For rental businesses, understanding the key takeaways bonus depreciation has to offer like the history, current status, and future of bonus depreciation is essential for strategic tax planning.

Origins of Bonus Depreciation Under the TCJA

When the TCJA was enacted, one of its flagship features was the introduction of a temporary 100% bonus depreciation allowance for qualifying assets. This generous provision applied to assets acquired and placed in service between September 27, 2017, and January 1, 2023. The goal was to incentivize businesses to invest in capital assets like commercial or residential rental property by allowing them to immediately deduct the entire cost rather than spreading deductions over the asset’s useful life.

This immediate expensing proved particularly beneficial for industries with high upfront equipment or property improvement costs, such as real estate, manufacturing, and retail. By accelerating tax savings, the 100% allowance gave businesses more liquidity to reinvest and grow. However, the TCJA explicitly designated this measure as temporary, with a gradual phase-out beginning in 2023.

Qualifying Properties and Improvements

So, can you take bonus depreciation on rental property? Yes! To qualify for bonus depreciation on rental property, assets must meet specific IRS criteria. These include:

• Qualified Non-Residential Properties: Examples include retail centers, hospitals, hotels, and motels.
• Property and Land Improvements: Improvements such as replacing HVAC systems, flooring, plumbing, or lighting are considered qualified improvement property (QIP).
• Timing: Assets must be acquired and placed in service during the eligible timeframe.

For instance, consider a business that purchased a hotel in 2022 and is upgrading its HVAC system and flooring. These renovation costs are eligible for bonus depreciation as qualified improvement property. If the hotel is placed in service by December 31, 2023, the business can claim a 60% bonus depreciation deduction for these upgrades.

The Phase-Out of Bonus Depreciation

Starting in 2023, the bonus depreciation allowance began decreasing annually, marking the end of the 100% allowance period. The current schedule for the phase-out is as follows:

• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation
• 2027: 0% bonus depreciation

So, as of the 2025 tax season, taxpayers are still allowed to claim bonus depreciation for property placed in service in the above years. After 2026, businesses will no longer be able to immediately use their bonus depreciation expense for qualifying assets. Instead, they must revert to the Modified Accelerated Cost Recovery System (MACRS) unless Congress renews the allowance.

Unlike bonus depreciation, MACRS requires businesses to spread asset costs over their useful lives, resulting in smaller annual deductions. This change will significantly alter the tax landscape, especially for businesses accustomed to the advantages of accelerated depreciation.

The Importance of Placed-in-Service Dates

One critical aspect of bonus depreciation is the concept of “placed in service.” According to IRS regulations, an asset is considered placed in service when it is ready and available for its intended use. Courts have clarified that actual use is not required, but the asset must be in operational condition.

The placed-in-service date is crucial because bonus depreciation rates are determined by the year the asset becomes operational. For example:

• A property placed in service on December 31, 2024, qualifies for 60% bonus depreciation.
• The same property placed in service just one day later, on January 1, 2025, would only qualify for 40% because it falls under a new tax year bonus depreciation percentage.

This point underscores the importance of timing in tax planning. Businesses aiming to maximize their bonus depreciation deductions must ensure their assets are operational by December 31 of the relevant tax year.

Strategic Tax Planning for Rental Businesses

The upcoming sunset of bonus depreciation demands proactive planning. Rental businesses should consider the following strategies to maximize their tax benefits:

1. Accelerate Capital Expenditures: Investing in qualifying assets before December 31, 2025 allows businesses to take advantage of the remaining bonus depreciation percentages.
2. Consult Tax Professionals: A tax advisor can help determine the optimal timing for purchases and placements in service to maximize deductions.
3. Review Placed-in-Service Readiness: Ensure all assets are operational by the end of the year to lock in higher bonus depreciation rates.

In addition to these strategies, businesses should explore alternative depreciation options, such as Section 179 expensing, for assets purchased after 2025. While less flexible than bonus depreciation, Section 179 remains a valuable tool for managing tax liabilities.

Impact of the 2025 Sunset

The phase-out of bonus depreciation marks a significant shift in the tax landscape. The gradual reduction of bonus depreciation has already begun to influence business decisions. By 2025, the allowance will decrease to 40% for assets placed in service after December 31, 2024. This phase-out incentivizes businesses to expedite capital expenditures to maximize allowable deductions before they diminish further.

The sunset of the TCJA provisions will also drive businesses to reevaluate their long-term tax strategies. After 2026, companies will likely turn to other depreciation methods, such as Section 179 expensing. While Section 179 offers significant benefits, including the ability to immediately deduct certain asset costs, it is subject to stricter limits and eligibility criteria than bonus depreciation.

Congress may also revisit bonus depreciation in the future. Given its popularity and the economic stimulus, it provides, there is always the possibility of new legislation to reinstate or extend similar provisions. However, businesses should base their planning on the current tax code to avoid potential risks.

Bonus Depreciation and You

Bonus depreciation, introduced as part of the Tax Cuts and Jobs act of 2017, revolutionized the way businesses manage capital investments. By allowing immediate deductions for qualifying assets, it offered unprecedented tax benefits and liquidity. However, as this provision sunsets, businesses must prepare for a return more traditional depreciation methods.

Maximizing bonus depreciation while it lasts requires careful planning. Businesses must prioritize the timely placement of assets in service, consult with tax professionals, and consider alternative strategies for the future. While the expiration of this powerful tax tool presents challenges, it also provides an opportunity for companies to innovate and optimize their tax approaches in a post-TCJA landscape.

Disclaimer: Ledgre does not provide tax or legal advice. All information and materials available on this site are for general informational purposes only. Contact a tax professional for advice with respect to a specific tax matter.