Quick overview

100% bonus depreciation lets many businesses expense the entire cost of qualifying assets in the year they are placed in service instead of spreading deductions over several years through regular depreciation. The provision was expanded by the Tax Cuts and Jobs Act (TCJA) to apply to new and used property acquired and placed in service after September 27, 2017, and then phases down by statute beginning in 2023 (80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026, and generally 0% thereafter unless Congress acts). See IRS Publication 946 and the Instructions for Form 4562 for official rules and reporting requirements (IRS).

This article explains who can use the election, when electing 100% bonus depreciation makes sense, how to claim or opt out, practical planning considerations, and common pitfalls — with actionable steps you can use in year‑end planning.

Who can use 100% bonus depreciation and what qualifies

  • Eligible taxpayers: Sole proprietors, partnerships, S corporations, C corporations and other business entities that acquire qualified property.
  • Qualified property: Generally includes tangible property with a recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property (subject to rules). Land and inventory are not eligible. The federal rules allow both new and used property that meets the acquisition and use dates established by the TCJA and subsequent guidance (IRS Publication 946).
  • Date placed in service: You claim bonus depreciation in the tax year the asset is first placed in service for business use.

Because state tax treatment varies, many states do not conform to federal bonus depreciation, requiring add‑backs on state returns. Confirm state conformity before relying on a federal deduction to plan cash flow.

When electing 100% bonus depreciation typically makes sense

  1. You expect high taxable income in the current year. Accelerating deductions is most valuable when it reduces current taxable income at meaningful tax rates.
  2. You need near‑term cash flow. Immediate expensing lowers current tax bills or increases refunds, freeing cash for reinvestment or debt repayment.
  3. You have no near‑term use for multi‑year deductions. If your business will be consistently profitable at similar or higher levels, accelerating deductions now may be better than preserving them for later when they might be less valuable.
  4. You don’t expect significant state tax mismatches or can manage state add‑backs. If state conformity is unfavorable, the federal cash benefit may be reduced by state tax payments or compliance complexity.
  5. You’re replacing obsolete equipment and want to maximize after‑tax returns on replacement investments.

Real example from practice: a manufacturer purchasing $250,000 of equipment applied bonus depreciation and reduced federal taxable income substantially for that year, freeing cash for working capital and expansion. That immediate benefit outweighed the lost multi‑year deductions due to predictable growth.

When to reconsider electing 100% bonus depreciation

  • If you expect current year losses or large net operating loss (NOL) carryforwards to be more valuable when saved for a future high‑rate year.
  • If you expect to sell the asset soon at a gain, because depreciation can create recapture (e.g., Section 1245 recapture on personal property) and accelerate tax on disposition.
  • If your business is tax‑exempt, or the deduction produces no tax benefit due to other limitations.
  • If state tax add‑backs or conformity differences make the federal benefit small or produce undesirable state cash outcomes.

Interaction with Section 179 and other deductions

Section 179 is a separate immediate expensing election with different limits, eligibility rules, and taxable income limitations. In many years businesses maximize benefit by using Section 179 up to its limits for smaller assets and then applying bonus depreciation to larger purchases. For an overview of how these two rules work together, see FinHelp’s guide on Business Depreciation Basics and our dedicated Section 179 page.

Always model both options in a tax projection because Section 179 is limited by taxable income and annual caps while bonus depreciation is not subject to the same dollar cap (but may be limited by tax accounting method or partnership allocations).

How to claim or elect out

  • Claiming: Report bonus depreciation on IRS Form 4562, Depreciation and Amortization, in the year the property is placed in service. Follow the form instructions and the applicable lines for the special depreciation allowance (see Instructions for Form 4562) (IRS).
  • Electing out: The federal rules allow a taxpayer to elect out of bonus depreciation for a class of property. An election out is made on the timely filed tax return (including extensions) and must be made for each class of property for which you opt out. Consult Form 4562 instructions and your tax advisor for the correct statement and placement.

Because bonus depreciation is taken on the tax return for the year the property is placed in service, you cannot retroactively apply it to prior tax years. Review Form 4562 instructions and IRS Publication 946 for current procedural guidance (IRS Publication 946; Form 4562 Instructions).

Practical year‑end decision checklist

  1. Project current year taxable income and tax liability; model the impact of full expensing vs. multi‑year depreciation. Include federal and state taxes.
  2. Confirm property is qualified and note the placed‑in‑service date. Bonus depreciation applies in the year property is placed in service for business use.
  3. Check your state conformity rules for bonus depreciation and calculate state add‑backs and cash impact.
  4. Consider NOLs and carryforwards — would accelerating deductions now create NOLs that are less valuable than using the deductions in later years?
  5. Evaluate potential sale or disposition timing — if you plan to sell the asset, consider depreciation recapture consequences.
  6. Coordinate with financing: loan covenants or lender accounting may be affected by whether you expense or capitalize assets.
  7. File Form 4562 correctly or instruct your preparer to do so; if electing out, attach the required statement to the timely filed return.

Common mistakes and how to avoid them

  • Misidentifying qualified property. Solution: Use the asset’s recovery period and acquisition requirements in IRS Pub 946 to confirm eligibility.
  • Forgetting state tax differences. Solution: Run a federal vs. state tax projection and consult your state’s department of revenue guidance.
  • Not making or documenting an election out properly. Solution: If you intend to preserve multi‑year depreciation for planning reasons, work with your CPA to file the necessary statement.
  • Ignoring recapture rules on sale. Solution: Include projected dispositions in planning so you are not surprised by higher taxes due to recapture.

Examples (concise)

  • Small retailer: Bought $120,000 of fixtures and POS equipment. Electing 100% bonus depreciation reduced federal taxable income substantially in a profitable year and funded inventory expansion.
  • Construction firm: Purchased $300,000 in heavy equipment late in the year. Because the company expected higher future revenue, they modeled both approaches and used a mix of Section 179 and bonus depreciation to balance current benefit with future tax planning.

FAQs (brief)

  • Can I elect 100% bonus depreciation for used property? Yes — under TCJA rules, used property can qualify if it meets the acquisition and use requirements (IRS Publication 946).
  • Can I change my mind after filing? Generally no — once you elect bonus depreciation on a timely filed return, retroactive changes are limited. Electing out must be done with the timely filed return for that year.

Final planning notes and professional disclaimer

Electing 100% bonus depreciation is a powerful tool for accelerating tax deductions and improving short‑term cash flow. However, it requires deliberate planning: consider year‑to‑date taxable income, projected future income, state tax conformity, planned asset dispositions, and the interaction with Section 179. In my practice I routinely run side‑by‑side projections to quantify the tradeoffs before recommending full expensing.

This article is educational and does not replace personalized tax advice. Always consult your CPA or tax advisor who can model your facts and applicable state rules. For detailed federal rules and reporting requirements, see IRS Publication 946, How To Depreciate Property, and the Instructions for Form 4562 (IRS: https://www.irs.gov/publications/p946; https://www.irs.gov/forms-pubs/about-form-4562).

Sources

  • Internal Revenue Service, Publication 946, How To Depreciate Property (IRS).
  • Internal Revenue Service, Instructions for Form 4562, Depreciation and Amortization (IRS).
  • Tax Cuts and Jobs Act, Pub. L. No. 115‑97.

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