8616 / What is bonus depreciation? How were the bonus depreciation rules changed by the 2017 tax reform?
Editor’s Note: See heading below for a discussion of the changes made by the 2020 CARES Act.
Bonus depreciation is essentially an extra amount of depreciation that a taxpayer is entitled to take in the first year that newly acquired qualified property is placed into service (the percentage of bonus depreciation available varies by year, as listed in the schedule below).1 The IRS has provided procedures on how to claim bonus depreciation (see Q for special rules that apply post-reform).2 Bonus first-year depreciation applies only to qualified property (see Q ) and is claimed in the first year that the property is placed in service.
Under the 2017 tax reform legislation, the bonus depreciation allowable depends upon the year the property was placed in service, and is the following percentage of the unadjusted depreciable basis of qualified property:
Property placed in service after September 27, 2017 and before January 1, 2023: 100 percent expensing.
Property placed in service after December 31, 2022 and before January 1, 2024: 80 percent expensing.
Property placed in service after December 31, 2023 and before January 1, 2025: 60 percent expensing.
Property placed in service after December 31, 2024 and before January 1, 2026: 40 percent expensing.
Property placed in service after December 31, 2025 and before January 1, 2027: 20 percent expensing.
2027 and thereafter: 0 percent expensing.3
The 2025 OBBB restored 100% bonus depreciation. The 100% bonus depreciation provision is permanent for qualified property that is acquired and placed into service on or after January 20, 2025. The OBBB created an additional elective 100% depreciation deduction for certain “qualified production property,” or (QPP). This elective additional deduction is temporary and allowed only through 2030. “QPP” is defined to include newly constructed (and some existing) non-residential real estate that is used in “qualified production activities.” Qualified production activities include manufacturing, production, or refining of defined tangible personal property within in the U.S.
For certain property with longer production periods, the modified schedule that applies under the 2017 tax reform legislation is as follows:
Property placed in service after September 27, 2017 and before January 1, 2024: 100 percent expensing.
Property placed in service after December 31, 2023 and before January 1, 2025: 80 percent expensing.
Property placed in service after December 31, 2024 and before January 1, 2026: 60 percent expensing.
Property placed in service after December 31, 2025 and before January 1, 2027: 40 percent expensing.
Property placed in service after December 31, 2026 and before January 1, 2028: 20 percent expensing.
2028 and thereafter: 0 percent expensing.4
Under a transition rule, a business was entitled to elect to apply a 50 percent depreciation allowance instead of the 100 percent allowance for the taxpayer’s first tax year ending after September 27, 2017 (see Q for more information on making this election).5
The 2020 CARES Act
The CARES Act provided retroactive relief for many business owners, including fixing the so-called “retail glitch” to allow businesses to take advantage of 100 percent bonus depreciation on qualified improvement property through 2022. The CARES Act retroactively reduced the recovery period for qualified improvement property placed in service after 2017 from 39 years to 15 years. Eligible taxpayers may be entitled to a refund. Corporate taxpayers should also examine the interaction between the depreciation relief and the CARES Act NOL carryback relief (see Q 8013 and Q 8014).
The IRS has provided guidance on how to make, revoke or withdraw elections relating to the CARES Act bonus depreciation rule changes. Because of the administrative burden of filing amended returns and AARs, the IRS will treat late or revocable elections for property placed in service by taxpayers during their 2018, 2019, or 2020 taxable years, as a change in method of accounting with a Section 481(a) adjustment for a limited period of time. As a result, taxpayers can generally make, revoke or withdraw elections with respect to bonus depreciation by filing an amended tax return, AAR or Form 3115 (with the taxpayer’s federal income tax return or Form 1065). The action is essentially treated as changing from an impermissible method of determining depreciation to a permissible method. Returns or forms were generally required to be filed by October 15, 2021. This amended return or AAR must include the adjustment to taxable income for the change in determining depreciation of the qualified improvement property and any collateral adjustments to taxable income or to tax liability.
These election methods do not apply to certain farming businesses or electing real property businesses, who must make elections under the procedures in Revenue Procedure 2020-22. Partnerships subject to the partnership audit rules use the procedures in Revenue Procedure 2020-23.
Revenue Procedure 2020-23 provides relief so that partnerships subject to the new partnership audit rules can also now file amended returns, rather than waiting to file current year returns to claim the benefits. Preexisting law may have prevented partnerships from filing amended Forms 1065 and Schedules K-1. Partnerships may file amended returns and issue revised Schedules K-1 for 2018 and 2019 to take advantage of retroactive CARES Act bonus depreciation relief.
The Revenue Procedure 2020-23 relief applies for 2018 and 2019 as long as the original Forms 1065 and Schedules K-1 were filed/issued before April 13, 2020 (the date Rev. Proc. 2020-23 was released). Partnerships can file amended Form 1065 and Schedule K-1 (electronically or by mail), by checking the Form 1065 “amended return” box and writing “FILED PURSUANT TO REV PROC 2020-23” at the top. The same notation must be included in a statement attached to amended Schedules K-1 sent to partners. The amended returns had to be filed/furnished to partners by September 30, 2020.
1. Bonus depreciation has been available for most of the 20th century. In general, for certain property acquired after September 11, 2001, and before January 1, 2005, a depreciation “bonus” of 30 percent could be taken in the year the property was placed in service. For certain property acquired after May 5, 2003, and before January 1, 2005, 50 percent bonus depreciation could be taken. For certain qualified property placed in service in 2008 until 2017, bonus depreciation of 50 percent was allowed.
2. Rev. Proc. 2003-50, 2003-29 IRB 119.
3. IRC § 168(k)(6)(A).
4. IRC § 168(k)(6)(B).
5. IRC § 168(k)(8).