100% Bonus Depreciation: The Phase-Down Schedule, the Restoration Effort, and Strategic Planning Through 2027

The 100% bonus depreciation provision of the Tax Cuts and Jobs Act of 2017 was one of the most powerful capital expenditure incentives in U.S. tax history — allowing immediate expensing of qualifying business property regardless of cost or business income level. That provision, however, was enacted as a phase-down rather than a permanent change. From 100% in 2017-2022, bonus depreciation has been steadily declining, with significant economic implications for capital-intensive businesses.

The Bonus Depreciation Phase-Down Schedule

Section 168(k) provides bonus depreciation as a percentage of qualifying property cost, immediately deductible in the year placed in service:

• 2017 (post-September 27) through 2022: 100% bonus depreciation.

• 2023: 80% bonus depreciation.

• 2024: 60% bonus depreciation.

• 2025: 40% bonus depreciation (current).

• 2026: 20% bonus depreciation (scheduled).

• 2027 and beyond: 0% bonus depreciation (eliminated unless restored).

For property with longer production periods (transportation property, certain aircraft), the phase-down schedule is delayed by one year.

The Economic Impact

The phase-down has significant economic consequences for businesses making capital investments:

For a $100,000 piece of equipment placed in service:

• 2022: $100,000 immediate deduction (100% bonus).

• 2023: $80,000 immediate + standard MACRS on remaining $20,000.

• 2024: $60,000 immediate + standard MACRS on remaining $40,000.

• 2025: $40,000 immediate + standard MACRS on remaining $60,000.

• 2026: $20,000 immediate + standard MACRS on remaining $80,000.

• 2027: $0 immediate + standard MACRS over the property's recovery period.

For a business in the 32% federal bracket, the difference between 100% and 0% bonus depreciation on a $100,000 purchase is approximately $32,000 of year-one tax savings — pushed out across 5-7 years instead.

What Qualifies for Bonus Depreciation

Section 168(k) applies to property with a recovery period of 20 years or less, including:

• Equipment, machinery, and tools (5-7 year recovery).

• Computers and peripheral equipment.

• Vehicles (subject to §280F luxury auto limits for passenger autos).

• Office furniture and fixtures.

• Land improvements (15-year recovery).

• Qualified Improvement Property (QIP) for non-residential real property — 15-year recovery.

• Certain agricultural property.

• Software (off-the-shelf and certain custom).

Real estate buildings themselves (39-year for non-residential, 27.5-year for residential rental) do NOT qualify for bonus depreciation. However, components of a building reclassified to shorter lives through cost segregation studies CAN qualify.

Used Property Eligibility (Post-TCJA)

One of the major changes from TCJA was extending bonus depreciation to used property — provided it was not previously used by the same taxpayer or an entity related to the taxpayer. This change made bonus depreciation available for acquisitions of existing equipment, which had been excluded under prior law.

Section 179 vs Bonus Depreciation

Section 179 expensing and bonus depreciation often apply to the same property but operate differently:

• §179 is elective and limited by taxable income (cannot create or increase a net loss). 2025 limit: $1,250,000 with phase-out beginning at $3,130,000 in total purchases.

• Bonus depreciation applies automatically to all qualifying property unless the taxpayer elects out. Can create or increase a net loss.

The optimal sequence is generally: de minimis safe harbor first ($2,500/$5,000 per item), then Section 179 (to manage taxable income precisely), then bonus depreciation absorbs everything else.

The Restoration Effort

The Tax Relief for American Families and Workers Act of 2024 — passed by the House but not enacted into law — proposed restoring 100% bonus depreciation retroactively for 2023, 2024, and 2025. Multiple subsequent legislative proposals continue to push for restoration.

If 100% bonus depreciation is restored:

• Likely retroactive application allowing amended return refunds for 2023-2024 deductions taken at 80%/60%.

• Possible permanent extension or extension through specific years.

• Coordination with Section 174 R&D capitalization rules (often packaged together in legislation).

Taxpayers should monitor legislation throughout 2025 and consider Form 3115 filings or amended returns if restoration occurs.

Strategic Planning Through the Phase-Down

For businesses planning capital expenditures during the phase-down:

1. Accelerate purchases into earlier tax years when bonus depreciation is higher (to the extent business needs allow).

2. Coordinate Section 179 with bonus depreciation to maximize total first-year deductions while managing taxable income.

3. Time placement in service before year-end to capture current-year deduction (property must be placed in service, not just purchased, to qualify).

4. Evaluate cost segregation studies on real property — components reclassified to shorter lives qualify for bonus depreciation.

5. Coordinate with state conformity — California, Pennsylvania, and several other states do not conform to bonus depreciation.

Vehicle-Specific Application

For business vehicles, bonus depreciation interacts with the §280F luxury auto caps:

• Passenger autos under 6,000 lbs GVWR: §280F cap limits first-year deduction to $20,400 (with bonus) for 2025, regardless of bonus depreciation rate.

• Heavy SUVs (6,000-14,000 lbs GVWR): §179 sub-limit of $31,300 plus bonus depreciation on remaining basis at the current rate.

• Trucks over 14,000 lbs GVWR: Full §179 expensing and full bonus depreciation, no luxury auto limits.

Qualified Improvement Property Special Treatment

Qualified Improvement Property — interior improvements to non-residential real property made after the building is placed in service — has a 15-year recovery period and is eligible for both §179 and bonus depreciation. After the CARES Act technical correction, QIP is one of the most valuable categories for accelerated cost recovery on commercial real estate.

For commercial property owners completing tenant improvements, finish-out construction, restaurant build-outs, or store renovations, QIP treatment dramatically accelerates cost recovery.

Recapture on Sale

Property expensed under bonus depreciation is subject to depreciation recapture on sale:

• Section 1245 recapture for tangible personal property — taxed at ordinary income rates (up to 37% federal).

• Section 1250 recapture for real property components — taxed at maximum 25% federal rate.

For property sold within a few years of purchase, the bonus depreciation benefit may be largely reversed by recapture. Long-term hold strategies, §1031 exchanges (for real property), and hold-until-death strategies all preserve the bonus depreciation benefit.

State Conformity Issues

Several states do not conform to federal bonus depreciation:

• California: No bonus depreciation; uses standard MACRS only.

• Pennsylvania: No bonus depreciation.

• New York City: Decoupled from bonus depreciation provisions.

• Several others with varying degrees of non-conformity.

For taxpayers in non-conforming states, bonus depreciation creates a federal-state tax timing difference that requires separate state depreciation schedules.

Common Mistakes

• Failing to elect out of bonus depreciation in unprofitable years where deductions provide no current benefit.

• Missing the placed-in-service deadline (must be in service by year-end to claim current-year deduction).

• Not considering recapture on assets planned for short-term sale.

• Failing to track state vs federal depreciation differences in non-conforming states.

• Misclassifying real property as personal property to claim bonus depreciation (can be challenged on audit).

• Missing QIP eligibility for tenant improvement and renovation projects.

Bottom Line

Bonus depreciation under §168(k) remains one of the most powerful capital expenditure incentives — even at 40% in 2025. The phase-down through 2026 and elimination scheduled for 2027 create urgency for accelerating qualified purchases. Watch federal legislation throughout 2025 for potential restoration of 100% bonus depreciation, which could reshape the planning calculus retroactively. For capital-intensive businesses, bonus depreciation strategy should be coordinated with §179 elections, cost segregation studies, and overall income management at every annual planning cycle.