Bonus depreciation allows businesses to immediately deduct a large percentage of the cost of certain capital assets in the year those assets are placed in service, accelerating tax benefits and improving near-term cash flow. According to Daniel Bunn of the Tax Foundation and the Internal Revenue Service, the key determinants are the type of property, its recovery period under the Modified Accelerated Cost Recovery System, and the timing of acquisition and placement in service.
Eligible categories of property
Generally, qualified property is tangible property subject to MACRS with a recovery period of 20 years or less. This includes most machinery and equipment, certain furniture and fixtures, off-the-shelf computer software, and specified water utility property. Qualified improvement property is eligible when it meets the statutory definition and is placed in service by the taxpayer; Congress corrected a drafting error with the CARES Act so that interior building improvements can qualify as 15-year property and thereby become eligible for bonus depreciation. Used property can also qualify if it is newly acquired by the taxpayer and was not used by the taxpayer previously, a change enacted by the Tax Cuts and Jobs Act of 2017 and explained in Internal Revenue Service guidance.
Exceptions, timing, and consequences
Land, buildings themselves, and inventory generally do not qualify for bonus depreciation, though particular building components or improvements may qualify if they meet the definition of qualified improvement property. The acquisition and placed-in-service dates matter because the percentage of allowable bonus depreciation has changed over time and is subject to phase-downs specified by statute. Businesses should note interactions with Section 179 expensing limits and that claiming bonus depreciation reduces future depreciation deductions and can affect asset basis on sale.
Practically, accelerated expensing provides immediate tax relief that can encourage investment in equipment and may be especially valuable for small and growing firms, improving cash flow for hiring or expansion. Territorial and cultural factors appear in state tax treatment: many U.S. states do not conform fully to federal bonus depreciation rules, creating compliance complexity and potential state tax liabilities. Environmentally, accelerated write-offs can incentivize replacement of older, less efficient equipment but may also encourage rapid capital turnover. For precise application to a specific asset or transaction, taxpayers should consult the Internal Revenue Service guidance and a qualified tax professional to account for timing, state conformity, and long-term tax planning.