Here’s what HIVE AI had to say about “How does bonus depreciation phase down after 2023?”:
Bonus depreciation, also known as the additional first year depreciation deduction under Section 168(k), follows a specific phase-down schedule that began after 2023. Understanding this phase-down is crucial for tax planning as it significantly impacts the immediate tax benefits available for qualifying business property investments.
The Phase-Down Schedule
The bonus depreciation percentage is 100 percent for most property placed in service between September 28, 2017 and the end of 2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and 0 thereafter. This represents a systematic reduction of 20 percentage points each year following the expiration of the full 100% bonus depreciation period.
For the current tax year 2024, the special depreciation allowance is 60% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2023, and before January 1, 2025 (other than certain property with a long production period and certain aircraft). IRS – Publication 225: Farmer’s Tax Guide Certain qualified property (other than property with a long production period and certain aircraft) placed in service after December 31, 2023, and before January 1, 2025, is limited to a special allowance of 60% of the depreciable basis of the property. IRS – Instruction 4562: Instructions for Form 4562, Depreciation and Amortization (Including Information on Listed Property)
Special Rules for Long Production Period Property and Aircraft
There are important exceptions to the general phase-down schedule for certain types of property. For certain property with a long production period and certain aircraft placed in service after December 31, 2023, and before January 1, 2025, the special depreciation allowance is 80%. IRS – Publication 225: Farmer’s Tax Guide This means these special categories of property receive more favorable treatment, maintaining the higher 80% rate for an additional year compared to other qualifying property.
Looking ahead to 2025, the special depreciation allowance is 40% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2024, and before January 1, 2026 (other than certain property with a long production period and certain aircraft). For certain property with a long production period and certain aircraft placed in service after December 31, 2024, and before January 1, 2026, the special depreciation allowance is 60%. IRS – Publication 225: Farmer’s Tax Guide
Application to Specified Plants
The phase-down also applies to certain agricultural property. For plants which are planted or grafted: (i) after September 27, 2017, and before January 1, 2023, 100 percent, (ii) after December 31, 2022, and before January 1, 2024, 80 percent, (iii) after December 31, 2023, and before January 1, 2025, 60 percent, (iv) after December 31, 2024, and before January 1, 2026, 40 percent, and (v) after December 31, 2025, and before January 1, 2027, 20 percent. IRC § 168(k) The special depreciation allowance is also 60% for certain specified plants bearing fruits and nuts planted or grafted after December 31, 2023, and before January 1, 2025, and 40% for planted or grafted after December 31, 2024, and before January 1, 2026. IRS – Publication 225: Farmer’s Tax Guide IRS – Publication 225: Farmer’s Tax Guide
Practical Examples of the Phase-Down
The Treasury Regulations provide helpful examples showing how the phase-down works in practice. For 2023, a taxpayer is allowed an 80-percent additional first year depreciation deduction of $160,000 (the unadjusted depreciable basis of $200,000 multiplied by 0.80). In addition, the taxpayer’s depreciation deduction for 2023 for the remaining adjusted depreciable basis of $40,000 (the unadjusted depreciable basis of $200,000 reduced by the additional first year depreciation deduction of $160,000) is $8,000. Tresuary Reg. Treasury Regulation None
Another example demonstrates the interaction with Section 179: For 2023, a taxpayer is allowed an 80-percent additional first year depreciation deduction of $400,000 (the unadjusted depreciable basis of $500,000 multiplied by 0.80). Next, the taxpayer must reduce the unadjusted depreciable basis of $500,000 by the additional first year depreciation deduction of $400,000 to determine the remaining adjusted depreciable basis of $100,000. Then, the taxpayer’s depreciation deduction allowable in 2023 for the remaining adjusted depreciable basis of $100,000 is $20,000. Tresuary Reg. Treasury Regulation None
Historical Context and Legislative Background
The current phase-down represents a significant change from earlier bonus depreciation regimes. Section 13201 of the Tax Cuts and Jobs Act amended section 168(k) to extend and modify the additional first year depreciation deduction for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2027. The additional first year depreciation deduction allowed under section 168(k) is equal to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, and thereafter is phased down 20 percentage points each year for property placed in service through December 31, 2026.
Prior to the Tax Cuts and Jobs Act, bonus depreciation had different percentages and phase-down schedules. Under the pre-Act section 168(k), the bonus percentage for most property was 50 percent in 2017, 40 percent in 2018, 30 percent in 2019, and zero thereafter. The Act significantly enhanced these benefits by providing 100% bonus depreciation for several years before implementing the current phase-down.
Economic and Policy Implications
The phase-down of bonus depreciation has significant implications for business investment decisions. Qualifying property placed in service after September 27, 2017, and before January 1, 2023, qualifies for full bonus depreciation. The bonus depreciation rate is phased down 20 percent a year for property placed in service after this date. This creates a strong incentive for businesses to accelerate their capital investments to take advantage of higher depreciation percentages in earlier years.
The systematic reduction in bonus depreciation percentages means that businesses face diminishing tax benefits for equipment purchases as time progresses. This creates a natural urgency for capital investment decisions, as delaying purchases results in lower immediate tax deductions. For example, equipment placed in service in 2024 receives only 60% bonus depreciation, while the same equipment placed in service in 2025 would receive only 40% bonus depreciation.
Planning Considerations
The phase-down schedule requires careful timing considerations for business investments. Companies should evaluate whether to accelerate planned equipment purchases to capture higher bonus depreciation percentages in earlier years. However, this must be balanced against business needs, cash flow considerations, and the overall economic benefits of the investment timing.
The different treatment for long production period property and aircraft adds complexity to the planning process, as these assets maintain higher bonus depreciation percentages for longer periods. This differential treatment reflects the longer lead times typically required for these types of investments and the policy goal of maintaining investment incentives for these capital-intensive sectors.
The complete elimination of bonus depreciation after 2026 represents a significant change in the tax landscape for business equipment purchases. Without legislative action to extend or modify these provisions, businesses will need to rely solely on regular depreciation schedules and Section 179 expensing for immediate tax benefits from equipment purchases.
Sources
- IRC § 168(k)
- Treasury Regulation Examples
- IRS Publication 225: Farmer’s Tax Guide
- IRS Instructions for Form 4562
- IRS Notice 2018-30
- Treasury Decision 9874
- Revenue Procedure 2017-33
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