Section 168(k) Bonus Depreciation
A federal tax provision allowing first-year deduction of a percentage of the cost of qualifying business property, restored to 100 percent under OBBBA for assets placed in service after January 19, 2025.
Detailed Explanation
Bonus depreciation under IRC Section 168(k) applies to most tangible property with a recovery period of 20 years or less, off-the-shelf software, and qualified improvement property. Unlike Section 179, bonus depreciation has no taxable income limit and can create or increase a net operating loss. Originally scheduled to phase down to zero by 2027 under the Tax Cuts and Jobs Act, OBBBA permanently restored 100 percent bonus depreciation for qualifying assets placed in service after January 19, 2025. Used heavily with cost segregation studies to accelerate real estate deductions.
Key Points
- First-year deduction for qualifying property with a recovery period of 20 years or less.
- OBBBA restored 100% bonus depreciation permanently for property placed in service after January 19, 2025.
- No taxable income limit, so unlike Section 179 it CAN create or increase a net operating loss.
- Applies automatically unless the taxpayer elects out by asset class.
- Pairs powerfully with cost segregation to accelerate real estate deductions.
Practical Example
A landlord buys a $1,000,000 rental and a cost segregation study reclassifies $250,000 into 5, 7, and 15-year property. With 100% bonus depreciation, the landlord deducts the full $250,000 in year one (on top of the regular building depreciation), creating a large paper loss that may offset other income if the taxpayer materially participates or qualifies as a real estate professional.
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Learn about Tax Planning & StrategyRelated Terms
Section 179 Expensing
A federal tax provision allowing businesses to fully expense the cost of qualifying tangible property and certain real estate improvements in the year of purchase, up to a statutory cap.
Depreciation
The deduction of the cost of a tangible business asset over its useful life, reflecting wear, tear, or obsolescence.
Cost Segregation Study
An engineering-based analysis that reclassifies portions of a building into shorter-life property categories to accelerate depreciation deductions in the early years of ownership.
Depreciation Recapture
The portion of gain on sale of depreciated property that is taxed at higher rates rather than long-term capital gain rates, recovering previously claimed depreciation deductions.
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