Being a small business owner offers many opportunities for tax savings, but navigating deductions like bonus depreciation can feel overwhelming. In this guide, we break down everything you need to know about bonus depreciation — what it is, how it works, who qualifies, and how it compares to Section 179 — so you can make the most of your small business tax strategy.
🔍 At a Glance
- Bonus depreciation allows businesses to deduct a percentage of an asset’s cost upfront.
- Only specific types of qualified property are eligible.
- Bonus depreciation and Section 179 are not the same — but sometimes both can be used in the same year.
What Is Bonus Depreciation?
Bonus depreciation is a type of accelerated depreciation that enables you to deduct a set percentage of an asset’s cost in the first year, rather than over the asset’s useful life. For 2024, the rate is 60%.
Example: If you purchase an eligible machine worth $100,000 in 2024, you can deduct $60,000 immediately as bonus depreciation, lowering your taxable income significantly.
Bonus Depreciation vs. Section 179: What’s the Difference?
While bonus depreciation and Section 179 are both methods to recover the cost of business property, they have key differences:
Section 179:
- Deducts a set dollar amount — up to $1,220,000 in 2024.
- Phases out after $3,050,000 in total asset purchases.
- Cannot exceed your business’s net income (no net loss allowed).
Bonus Depreciation:
- Deducts a fixed percentage — 60% in 2024 (set to decline to 40% in 2025).
- No spending limits — can be used even if it creates a net loss.
- You can carry forward net losses to future tax years.
Tip: You can use both in the same year — but Section 179 must be applied first, then bonus depreciation can be used for any remaining balance.
Bonus Depreciation Rules for 2024
Tax Cuts and Jobs Act Impact
Under the Tax Cuts and Jobs Act (TCJA) of 2017, businesses were allowed to deduct 100% of the cost of qualified assets purchased after Sept. 27, 2017, and before Jan. 1, 2023. However, that rate is now decreasing annually:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0% (unless Congress extends the provision)
Eligible Property for Bonus Depreciation
To qualify, the asset must be considered qualified property under IRS rules. Key qualifications include:
- Useful life of 20 years or less — includes vehicles, tools, machinery, etc.
- Listed property — if used for both business and personal use, it must be used at least 50% for business.
- Qualified improvement property — interior improvements made to nonresidential buildings.
- Short-term rental properties — vacation rentals with average stays under 7 days.
- Other costs — such as off-the-shelf software, film and TV productions, or live theatrical productions.
Important: You must claim bonus depreciation in the year the asset was placed in service — not the year it was purchased.
Should You Use Bonus Depreciation or Section 179?
The answer depends on your specific tax situation.
- If your business is profitable and you’re under the Section 179 limits, Section 179 might give you better control over how much to deduct.
- If your business has a net loss or needs to deduct beyond Section 179 limits, bonus depreciation is often more advantageous.
In many cases, a smart tax strategy may involve using both deductions together. Always speak to a tax professional or use tax software to evaluate what combination benefits you the most.
How to Report Bonus Depreciation
To claim bonus depreciation, you must fill out IRS Form 4562 (Depreciation and Amortization). This form helps track which assets were placed in service and calculates the correct deduction.
Filing platforms like TaxAct® can guide you through the process step by step, ensuring you don’t miss out on any deductions.
Conclusion: Optimize Your Tax Strategy
Bonus depreciation and Section 179 offer small businesses powerful tools to reduce tax liability. Understanding the distinctions between them — and using them strategically — can make a significant difference in your financial outcomes.
As tax laws evolve, it’s important to stay informed. Whether you consult a tax advisor or use professional tax software like TaxAct, make sure your business is taking full advantage of these valuable tax-saving opportunities.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a qualified tax professional for advice specific to your situation.
