What is bonus depreciation?
Bonus depreciation, codified in IRC §168(k), allows a taxpayer to deduct an additional first-year depreciation amount on qualifying property — on top of the regular MACRS depreciation that would otherwise apply. When the bonus rate is 100%, the entire cost of qualifying property is fully deductible in the year placed in service.
The bonus depreciation timeline
| Tax year (placed in service) | Bonus rate |
|---|---|
| 2017 (after Sept 27) – 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025, acquired before Jan 20 | 40% |
| Acquired after Jan 19, 2025 (OBBBA) | 100% |
Why this matters: If you placed property in service in 2024 at 60% bonus, you missed 40% of the immediate deduction you could have had if you'd waited two weeks. That 40% isn't lost — it depreciates over the asset's normal MACRS life — but the time-value-of-money difference is real.
What property qualifies for bonus depreciation?
Property qualifies if it has a MACRS recovery period of 20 years or less. In practice, that includes:
- 5-year property — appliances, computers, furniture, equipment, decorative finishes, much personal property identified by cost segregation
- 7-year property — office furniture, agricultural fencing, certain manufacturing equipment
- 10-year property — single-purpose agricultural and horticultural structures
- 15-year property — land improvements (parking lots, sidewalks, landscaping), Qualified Improvement Property (QIP), retail motor fuel outlets
- 20-year property — farm buildings, certain utilities
Real estate itself — 27.5-year residential rental and 39-year non-residential — does not qualify for bonus depreciation. That's the exact reason cost segregation exists: to identify the components of a building that fall into the shorter MACRS classes and therefore do qualify for bonus.
How cost segregation unlocks bonus depreciation on real estate
Without a study, the IRS treats most components of a commercial building as part of the structure — depreciated over 39 years. With a study, an engineer itemizes the building component-by-component and reclassifies dollars into the shortest defensible recovery class. Each dollar that lands in 5-, 7-, 10-, or 15-year property is now bonus-eligible — meaning it can be fully deducted in year one under OBBBA.
Typical reclassification on a commercial property: 20–35% of cost basis moved to short-life property. Apply 100% bonus depreciation, and that 20–35% is fully deductible the year the study is completed.
OBBBA also kept Section 179 expensing
OBBBA preserves §179 expensing for tangible personal property, with elevated thresholds. §179 and bonus depreciation interact: §179 is taken first (subject to taxable income limitation), then bonus depreciation, then regular MACRS. Your CPA optimizes the order based on your specific facts. For a typical cost segregation study, bonus depreciation captures most of the benefit because there's no taxable income limit.