The special depreciation allowance, also known as bonus depreciation, is an extra allowance that businesses can take in the first year a property depreciated under the MACRS method is placed in service. This additional deduction can be taken on top of regular depreciation and allows businesses to recover the cost of their investments more rapidly. The special depreciation allowance applies only for the first year the property is placed in service.

The special depreciation allowance was introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA) and has enabled businesses to deduct in one year the full cost of an item that would otherwise be depreciated over many years. Currently, the special depreciation allowance is 100% for qualified property acquired. However, starting January 1, 2023, the applicable percentage will drop to 80%.

Bonus depreciation is taken after any Section 179 deduction and before regular depreciation. Section 179 allows taxpayers to recognize depreciation expense on qualifying property when it is used more than 50% of the time for business. It allows business owners to deduct a set dollar amount of new business assets that have been put in place during the current tax year.

In summary, the special depreciation allowance is an additional deduction that businesses can take in the first year a property is placed in service, on top of regular depreciation. It allows businesses to recover the cost of their investments more rapidly. The special depreciation allowance is currently 100% for qualified property acquired, but the applicable percentage will drop to 80% starting January 1, 2023.