What Is Bonus Depreciation and Why Does the Phase-Out Matter?
For years, bonus depreciation was one of the most powerful tools in a business owner's tax arsenal. Under the Tax Cuts and Jobs Act of 2017 (TCJA), businesses could immediately deduct 100% of the cost of qualifying property placed in service after September 27, 2017. That meant a business buying $500,000 worth of equipment or qualified improvement property could wipe out $500,000 of taxable income in the very same year.
That era is winding down. The bonus depreciation rate began stepping down after 2022 and follows a scheduled phase-out: - 2023: 80% - 2024: 60% - 2025: 40% - 2026: 20% - 2027 and beyond: 0% (under current law)
Unless Congress acts to extend or restore the 100% rate, bonus depreciation will effectively disappear after 2026. For business owners, real estate investors, and pass-through entity owners in South Florida and across the country, this is not a distant problem. It is a planning problem that requires attention right now.
-- - ## What Property Qualifies for Bonus Depreciation?
Not every asset qualifies. Understanding which property is eligible shapes how you approach your planning.
Qualifying Property Categories - Tangible personal property with a recovery period of 20 years or less under MACRS (machinery, equipment, computers, vehicles, furniture) - Qualified film, television, and live theatrical productions - Qualified improvement property (QIP) - interior improvements to nonresidential buildings (15-year property under TCJA) - Used property that is new to the taxpayer (a major expansion from pre-TCJA rules)
What Does NOT Qualify - Land - Standard residential or commercial building structures (39-year or 27.5-year property) - Property used outside the United States - Property used in certain regulated utility businesses
One critical nuance: real estate investors have long assumed that buildings are excluded. That is largely true for the building structure itself. However, through a strategy called cost segregation, significant portions of a building's components can be reclassified as shorter-lived personal property or land improvements - making them eligible for bonus depreciation. More on that below.
-- - ## Core Planning Strategies Before the Window Closes
Accelerate Capital Expenditures Into Higher-Rate Years
The most straightforward strategy is timing. If your business is planning equipment purchases, leasehold improvements, or technology upgrades, consider pulling those acquisitions forward into years when the bonus depreciation rate is still meaningful. A deduction taken at 60% in 2024 is worth significantly more than the same deduction taken at 20% in 2026 or 0% in 2027.
This is particularly relevant for businesses in growth mode. If you are expanding a facility, upgrading manufacturing equipment, or outfitting a new location, the tax cost of delaying that capital spending is real and quantifiable.
Cost Segregation Studies for Real Estate Investors
For real estate investors in Florida, a cost segregation study can be one of the highest-value tax planning tools available before the phase-out cuts deeper. A cost segregation study is an engineering-based analysis that breaks a building's components into their proper asset classes. Items like specialty lighting, flooring, decorative fixtures, land improvements, and certain HVAC components can be reclassified from 39-year or 27.5-year property into 5-year, 7-year, or 15-year property.
Once reclassified, those components become eligible for bonus depreciation in the current year. On a $2 million commercial property, a cost segregation study might identify $400,000 or more in assets eligible for accelerated treatment. At a 60% bonus rate, that is a $240,000 first-year deduction that would not otherwise exist.
If you own investment property or are acquiring real property now, explore how cost segregation fits into your broader real estate and tax strategy.
Section 179 as a Complementary Tool
Section 179 is a separate but related deduction that allows businesses to expense the cost of qualifying property immediately, up to an annual dollar limit (currently $1,160,000 for 2023, indexed for inflation). Unlike bonus depreciation, Section 179 is not scheduled to phase out under current law.
However, Section 179 comes with its own limitations. It cannot create a business loss (bonus depreciation can). It applies only to certain property types. And the phase-out threshold applies to businesses placing large amounts of property in service.
The best approach is often a combination: use Section 179 to the extent it is available and efficient, then layer bonus depreciation on top for remaining eligible assets. The interplay between these two provisions requires careful analysis - the order in which they are applied matters for your overall tax picture.
Structuring Entities for Maximum Depreciation Benefit
How your business is structured affects how depreciation flows through to owners. Pass-through entities - S corporations, partnerships, and LLCs taxed as partnerships - pass depreciation deductions directly to owners, who may use them against their individual income (subject to passive activity and at-risk rules). C corporations use the deductions internally to reduce corporate taxable income.
For real estate investors using partnerships or LLCs, the allocation of depreciation among partners can also be structured in ways that maximize benefit under the partnership tax rules. This is a nuanced area where the entity structure you chose on day one can either amplify or limit your planning options today.
If you are unsure whether your current structure is optimized for these deductions, review your entity taxation position before year-end. The article Will Your Business's Legal Structure Work? is also a useful starting point for evaluating whether your existing structure still serves your goals.
Qualified Opportunity Zone Investments and Timing
Investors who have recognized capital gains might consider Qualified Opportunity Zone (QOZ) investments as part of their broader depreciation and deferral planning. While QOZ investments do not directly interact with bonus depreciation rules, the overall goal is the same: defer and reduce tax liability through intentional asset deployment and timing. Combining depreciation planning with deferral strategies requires a coordinated approach.
-- - ## The 1031 Exchange Interaction: A Caution for Real Estate Investors
Real estate investors who have been aggressive with cost segregation and bonus depreciation need to understand one important interaction: when you sell a property, previously claimed depreciation is subject to recapture. For personal property components reclassified through cost segregation, that recapture is taxed at ordinary income rates (not the more favorable 25% Section 1250 unrecaptured depreciation rate).
A properly structured 1031 like-kind exchange can defer that recapture - but the rules are specific and the timelines are strict. If you have claimed substantial bonus depreciation on a property you are planning to sell, coordinating with both a tax advisor and a transaction attorney before you list the property is essential.
For a practical walkthrough of the exchange mechanics, see Nuts and Bolts of an Internal Revenue Code Section 1031 Like-Kind Exchange. And if you are considering a Delaware Statutory Trust as a replacement property vehicle, review Delaware Statutory Trusts and How Can a Taxpayer Exchange Investment Real Estate in a Tax Deferred Like-Kind Exchange for an Interest in a Delaware Statutory Trust?.
-- - ## Legislative Uncertainty: Will Congress Restore 100% Bonus Depreciation?
This is the question every business owner is asking. There have been legislative proposals to restore the 100% bonus depreciation rate retroactively or prospectively. As of now, none have been enacted into law.
Relying on a legislative fix is not a planning strategy. It is a gamble. The prudent approach is to plan under current law while structuring your transactions to benefit if the law improves. That means: - Executing capital expenditures in the highest-rate year available to you - Completing cost segregation studies on properties you already own or are acquiring - Reviewing your entity and ownership structure with an eye toward tax efficiency - Keeping your transaction documents clean so you can adapt if the rules change
For businesses raising capital to fund these investments, the structure of your capital raise matters for depreciation allocation as well. See our series on Financing Through Exempt Private Capital Raise Transactions Under Regulation D - Part I for context on how capital structure and tax planning intersect.
-- - ## Why Integrated Legal and Tax Counsel Matters Here
Bonus depreciation planning sits at the intersection of tax law, transaction structure, entity formation, and real estate law. Most tax advisors look at this issue through a purely numerical lens. Most attorneys look at it through a purely transactional lens. The businesses that get the best outcomes are the ones working with advisors who see all of it together.
Peter Lindley brings a combination of legal counsel and Big 4 CPA experience to clients in Boca Raton and throughout South Florida. That integrated perspective - covering tax law, entity structure, real estate transactions, and corporate transactions - means your depreciation planning is coordinated with your broader legal and business strategy, not treated as a standalone spreadsheet exercise.
-- - ## Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. Tax laws and regulations are complex, subject to change, and their application depends on your specific facts and circumstances. Nothing in this article creates an attorney-client relationship. You should consult a qualified attorney and tax advisor before making any decisions based on the information presented here.
-- - ## Take Action Before the Phase-Out Cuts Deeper
The bonus depreciation schedule is set. Every year you wait costs you a percentage point of deduction. Whether you are a business owner planning capital expenditures, a real estate investor considering a cost segregation study, or an investor evaluating your entity structure, now is the time to run the numbers and put a plan in place.
Contact Peter P. Lindley, P.A. to schedule a consultation. With offices in Boca Raton, Peter works with business owners and investors across South Florida to develop strategies that work under the law as it is - and position you well if it changes. Request a consultation today.
Frequently Asked Questions
What is the current bonus depreciation percentage for 2024?
For property placed in service in 2024, the bonus depreciation rate is 60% under the Tax Cuts and Jobs Act phase-out schedule. The rate was 80% in 2023, drops to 40% in 2025, 20% in 2026, and is scheduled to reach 0% in 2027 under current law unless Congress acts to extend it.
Can real estate investors still use bonus depreciation?
Yes, but not on the building structure itself. Real estate investors can use bonus depreciation on personal property and land improvement components identified through a cost segregation study, as well as on qualified improvement property (15-year property). The cost segregation strategy can unlock significant first-year deductions on commercial and investment properties.
What is the difference between bonus depreciation and Section 179?
Both allow immediate expensing of qualifying assets, but they work differently. Section 179 has an annual dollar cap and cannot create a tax loss. Bonus depreciation has no dollar limit and can generate a loss that carries forward or back. Section 179 is not currently scheduled to phase out, while bonus depreciation is. Most effective planning uses both in a coordinated way.
Does bonus depreciation get recaptured when I sell a property?
Yes. When you sell an asset on which you claimed bonus depreciation, the previously deducted amount is subject to depreciation recapture. For personal property, recapture is taxed at ordinary income rates, which can be higher than capital gains rates. A properly structured Section 1031 like-kind exchange can defer this recapture, but the rules are strict and require careful advance planning.
Will Congress restore 100% bonus depreciation?
There have been legislative proposals to restore the 100% rate, but as of now none have been enacted into law. Planning under current law - and executing time-sensitive strategies while rates are still meaningful - is the prudent approach. It is always possible to adapt your plan if the law changes, but you cannot go back and claim a higher rate on property already placed in service.
How does entity structure affect bonus depreciation planning?
Entity structure significantly impacts how depreciation flows to owners and how it can be allocated. Pass-through entities like partnerships, LLCs, and S corporations pass deductions directly to owners, subject to passive activity and at-risk rules. Depreciation allocations among partners in an LLC or partnership can also be structured for maximum efficiency. Reviewing your entity structure as part of your depreciation planning - not separately from it - is important for getting the best outcome.