Bonus Depreciation
Bonus depreciation is a tax incentive that allows businesses to deduct a large percentage of an asset's cost in the first year of use, currently set at 60% for 2025 and phasing down each year.
Bonus depreciation works similarly to Section 179 but with some important differences. While Section 179 has a dollar cap and cannot create a loss, bonus depreciation has no dollar limit and can create or increase a net operating loss.
Under the Tax Cuts and Jobs Act, bonus depreciation was 100% through 2022, then began phasing down: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. After 2026, bonus depreciation expires unless Congress extends it.
Bonus depreciation applies to new and used property with a recovery period of 20 years or less, as well as qualified improvement property. Unlike Section 179, the asset does not need to be profitable — bonus depreciation can generate a tax loss you carry to other years.
Many businesses use bonus depreciation in combination with Section 179 to maximize first-year deductions. You might use Section 179 up to your income limit, then apply bonus depreciation to additional assets.
One strategic use: if you expect significantly higher income this year than next, accelerating deductions through bonus depreciation can shift tax savings to the higher-income year where they're worth more.
Practical Example
A medical practice buys $300,000 in equipment in 2025. Using 60% bonus depreciation, they deduct $180,000 in year one. Combined with regular depreciation on the remainder, the first-year deduction totals approximately $197,000 instead of $42,857 under straight-line depreciation.