The Phase-Down Schedule Every Investor Must Know
When Congress passed the Tax Cuts and Jobs Act in December 2017, it supercharged bonus depreciation by raising the rate to 100% and expanding eligible property to include used assets for the first time. For cost segregation, this was transformative: short-life components identified in a study could be fully expensed in Year 1 rather than depreciated over five or fifteen years.
But that 100% rate was never permanent. Under IRC §168(k)(6), bonus depreciation phases down according to a statutory schedule based on the year property is placed in service:
- 2022 and prior: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and beyond: 0% (bonus depreciation expires entirely)
"The additional first year depreciation deduction is equal to the applicable percentage of the adjusted basis of qualified property... For property placed in service after December 31, 2025, and before January 1, 2027, the applicable percentage is 20 percent." — IRC §168(k)(6)(A), as amended by the Tax Cuts and Jobs Act of 2017
What 20% Bonus Means in Practice
Consider a $10 million commercial office building placed in service in 2026. A cost segregation study identifies 25% of the depreciable basis — $2,500,000 — as 5-year and 15-year property. Here is how the Year 1 deduction compares under each bonus rate:
- 100% bonus (2022): Full $2,500,000 deducted in Year 1
- 60% bonus (2024): $1,500,000 in Year 1; $1,000,000 over MACRS schedule
- 20% bonus (2026): $500,000 in Year 1; $2,000,000 over MACRS schedule
- 0% bonus (2027): Nothing accelerated; full $2,500,000 spread over 5–15 years
At a 37% federal marginal rate, the difference between the 2026 and 2027 Year 1 tax benefit on that $10M building is approximately $370,000 — the tax on $1,000,000 of additional Year 1 deductions that disappear when bonus expires.
The Time Value of Money Argument
Even at 20%, bonus depreciation has significant value because it accelerates the deduction. A dollar of tax savings today is worth more than a dollar of tax savings three years from now. At a 7% discount rate — a reasonable hurdle rate for real estate investors — a $1 million deduction taken today is worth approximately $816,000 if deferred five years. The present value of that gap is real money.
IRS Notice 2019-08 provided additional guidance on how the bonus depreciation rules interact with the placed-in-service date, confirming that the relevant year is the year the property is placed in service, not acquired or contracted.
"Property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity." — Treasury Regulation §1.168(k)-2(b)(5)
Will Congress Extend Bonus Depreciation?
Legislative history suggests Congress has periodically extended bonus depreciation provisions when they lapsed — most notably in the American Taxpayer Relief Act of 2012 and again in the PATH Act of 2015. There is active lobbying to restore 100% bonus depreciation as part of broader tax legislation. However, no extension has been enacted as of the date of this article. Prudent tax planning assumes current law and acts accordingly.
Action Items for 2026
For property owners with existing holdings, a cost segregation study can still generate meaningful savings in 2026 even at 20% bonus. The residual MACRS depreciation on reclassified components — the 80% that isn't bonus-eligible this year — will accelerate over 5 or 15 years rather than 39 years, providing ongoing benefits regardless of bonus rates.
For investors closing on acquisitions or completing construction in 2026, placing property in service before year-end ensures eligibility for the 20% rate. Waiting until 2027 provides zero bonus benefit.
The bottom line: 2026 is not 2022, but it is dramatically better than 2027. Act accordingly.
