Bonus depreciation under the Modified Accelerated Cost Recovery System (MACRS) was substantially changed due to the Tax Cuts and Jobs Act (TCJA) of 2017, with one set of rules for property acquired and placed in service after 9/27/17 (the more common occurrence) and another set of rules for property acquired before 9/28/17 and placed in service after 9/27/17.

Although touted as unlimited expensing by the GOP and the press leading up to passage of the TCJA, this change is really the return of the 100% bonus deprecation, but with some differences.

The old rules continue to apply. Thus, depending upon which year, the property is placed in service, the allowable bonus depreciation will be:

Qualifying property includes that for which the first use began with the taxpayer:

Qualified improvement property means “any improvement to an interior portion of a building which is non-residential real property if such improvement is placed in service after the date such building was first placed in service,” except expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework of the building do not qualify.

The TCJA allows 100% expensing of tangible business assets (except structures) acquired after September 27, 2017, and through 2022, at which point it begins to phase out (IRC Sec. 168(k) amended by TCJA Sec. 13201(a). The bonus percentage will be:

A special phase out applies to aircraft and certain long-production period property; see summary table below.

Qualifying property can be new or used and the bonus rate applies to:

Generally, the election out of bonus depreciation can only be revoked with IRS consent, except that if made on a timely filed return, the election-out can be revoked on an amended return filed within six months of the original return's due date (excluding extensions). (Reg § 1.168(k)-1(e)(7)) But see the discussion below regarding Rev Proc 2020-25 that permits revoking the election made on 2018 and 2019 returns for a limited period of time.    

With enactment of the TCJA, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property did not qualify for bonus depreciation, which only applies to property with a 20-year or less recovery period. While it had been the intent of Congress to combine these properties as qualified improvement property with a 15-year MACRS recovery period, a drafting error in the TCJA legislation caused them to be assigned to the 39-year recovery period, which made them ineligible for bonus depreciation. This oversight was finally corrected in the CARES Act, enacted March 27, 2020, by retroactively assigning qualified improvement property placed in service after 2017 to the 15-year category.

The 15-year recovery period for qualified improvement property applies only to improvements "made by the taxpayer." The final regulations clarify that an improvement is considered made by a taxpayer if the property is constructed for the taxpayer.

Rev Proc 2020-25, which applies to years 2018, 2019 and 2020, requires taxpayers who previously filed two or more returns using the "incorrect" depreciation period of 39 years for qualified improvement property to file an accounting method change on Form 3115 to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. However, if only one “erroneous” return has been filed, either Form 3115 or an amended return may be filed. The amended return was due by October 15, 2021, but not later than the applicable period of limitations on assessment. If the qualified improvement property was expensed or Sec 179 was claimed, the above procedures don’t apply.

For electing real property trades or businesses or electing farming businesses that made a late election or withdrew an election related to the business interest limitations for the year that the qualified improvement property was placed in service, see Rev. Proc. 2020-22.

Property for which the bonus depreciation is claimed is exempt from the alternative minimum tax (AMT) depreciation adjustment, which requires that certain property depreciated on the 200% declining balance method for regular income tax purposes must be depreciated on the 150% declining balance method for AMT purposes. Under a change made by the PATH Act of 2015, if a taxpayer elects not to take the bonus depreciation allowance for qualified property, the property will not be subject to an AMT adjustment for depreciation if placed in service after 2015. In other words, AMT depreciation on property eligible for the bonus depreciation is computed the same way as for regular tax purpose with no AMT adjustment, even if the taxpayer elects out of bonus depreciation. (Code Sec. 168(k)(2)(G), as amended by the PATH Act)

The so-called “luxury auto” rules impose a maximum annual deduction for depreciation. These limits are included in chapter 3.11. In years after 2007 when the bonus depreciation is allowed, the first-year luxury auto limits were increased by $8,000 if the taxpayer elected bonus depreciation. Under the TCJA of 2017 the bonus depreciation element of the luxury auto continues to be $8,000 for years 2015 through 2022, with the following exceptions: In the case of a passenger automobile acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer: