Bonus depreciation has been one of the most powerful tax deductions available to business owners. But it is phasing out, and many business owners do not realize the clock is ticking.
What Is Bonus Depreciation?
Normally when you buy equipment, vehicles, or other business assets, you deduct the cost over several years through depreciation. Bonus depreciation lets you deduct a large percentage of the cost in the year you buy it.
The Phase-Out Schedule
Here is the critical timeline. In 2022, businesses could deduct 100% of qualifying assets in the first year. That dropped to 80% in 2023, 60% in 2024, and 40% in 2025. In 2026 it drops to 20%, and by 2027 it is gone entirely.
That means if you buy a $100,000 piece of equipment in 2025, you can deduct $40,000 immediately through bonus depreciation. The remaining $60,000 gets depreciated over the asset's useful life.
What Qualifies?
Most tangible business property with a recovery period of 20 years or less qualifies. That includes vehicles, machinery, equipment, computers, office furniture, and certain building improvements. The asset must be new to your business, though it does not have to be brand new. Used equipment qualifies as long as it is new to you.
Section 179 Still Exists
Do not confuse bonus depreciation with Section 179 expensing. Section 179 allows you to deduct up to $1,220,000 in qualifying assets in 2025. The key difference is that Section 179 is limited to your business income, while bonus depreciation can create a loss. They can be used together strategically.
Planning Strategies
Accelerate Purchases
If you were planning to buy equipment in 2026 or 2027, consider moving that purchase into 2025 to capture the higher bonus depreciation rate. The 20-point difference between 2025 and 2026 is significant on large purchases.Vehicle Strategy
Heavy vehicles over 6,000 pounds gross vehicle weight qualify for bonus depreciation without the passenger auto limitations. A qualifying SUV or truck purchased and placed in service in 2025 can generate a substantial first-year deduction.Document Placed-in-Service Dates
Bonus depreciation requires the asset to be placed in service during the tax year. Purchased is not the same as placed in service. If you buy equipment in December but do not start using it until January, it counts for the following year.Talk to Your Tax Professional First
The decision to accelerate depreciation should be part of a broader tax strategy built by your CPA or tax advisor. Taking a large deduction this year might save taxes now but could cost you in future years when you have no depreciation left to offset income. Run the numbers both ways before committing.
NexGen does not prepare tax returns or provide tax advice. Our job is to make sure your asset records, purchase documentation, and placed-in-service dates are accurately tracked. We partner with your tax preparer and advisors so they can make the best depreciation decisions for your situation.