Bonus depreciation has long been a powerful tool for commercial property owners and investors looking to accelerate tax deductions and improve cash flow. But what happens if you missed claiming it in a prior year? Can you go back and amend your tax return to take advantage of this valuable deduction?
Let’s explore what bonus depreciation is, whether amending a return is possible, and when you might want to opt in, or out, of this significant tax strategy.
What is Bonus Depreciation and How Does It Work?
Bonus depreciation allows taxpayers to immediately deduct a large percentage of the cost of eligible property in the year the property is placed in service, rather than spreading it out over the asset’s useful life. As of recent tax years, businesses could deduct up to 100% of qualifying assets upfront, though that percentage is gradually phasing down (80% in 2023, 60% in 2024, 40% in 2025, and so on unless extended or modified by new legislation).
Qualifying assets typically include:
- Tangible property with a recovery period of 20 years or less
- Qualified improvement property (QIP)
- Certain machinery, equipment, and even some land improvements identified in cost segregation studies
This accelerated deduction helps reduce current-year taxable income, resulting in immediate tax savings and improved cash flow.
Can You Amend a Tax Return to Claim Missing Depreciation?
If you missed taking bonus depreciation in a prior year, the good news is: yes, there is a way to correct it, but it doesn’t always involve amending your return.
Instead of amending, the IRS generally allows you to file Form 3115, Application for Change in Accounting Method, to catch up on missed depreciation. This method, commonly referred to as a Section 481(a) adjustment, allows taxpayers to adjust depreciation without needing to amend multiple prior-year returns.
However, in certain limited cases—such as if bonus depreciation was not properly elected out and you wish to retroactively apply it—an amended return might be necessary if you’re still within the open filing window (typically three years from the original due date of the return).
Electing Out of Bonus Depreciation: What You Need to Know
Not every taxpayer chooses to take bonus depreciation. The IRS requires taxpayers to make an affirmative election out of bonus depreciation if they do not want to claim it for eligible property.
This election must be made on a timely filed tax return, including extensions, for the year the property is placed in service. If you fail to make this election in time, the IRS assumes you’re taking bonus depreciation by default.
Failing to make the election and later realizing you’d have preferred to opt out can complicate your tax situation—and may not be reversible.
How to Make the Bonus Depreciation Election
To elect out of bonus depreciation, you must attach a statement to your timely filed return that clearly identifies:
- The class of property you are electing out for
- That you are making the election under IRC Section 168(k)(7)
This election applies only to the specific class of property placed in service during that tax year. If you’re working with a cost segregation provider like CSSI, we can help ensure the proper identification of asset classes and compliance with IRS guidelines.
When and Why to Elect Out of Bonus Depreciation
While it might seem counterintuitive to decline immediate tax deductions, there are strategic reasons to elect out of bonus depreciation:
- Tax planning over multiple years: You may want to spread deductions to offset income in future higher-income years.
- Preserving losses: If you’re already in a loss position, taking additional bonus depreciation may waste deductions you can’t use effectively.
- State tax implications: Some states do not conform to federal bonus depreciation rules, which can cause discrepancies in tax reporting.
- Passive activity loss limitations: For some investors, taking bonus depreciation might generate losses that are suspended due to passive loss limitations.
Deciding to opt out should be made in consultation with your tax advisor, factoring in your long-term tax strategy and investment goals.
The Impact of Bonus Depreciation on Your Tax Return
Bonus depreciation can dramatically lower your taxable income in the year assets are placed in service, sometimes even generating net operating losses (NOLs) that can be carried forward to future tax years.
When combined with a cost segregation study, bonus depreciation becomes even more powerful. By identifying and reclassifying short-life assets, a cost segregation study can increase the portion of a building eligible for bonus depreciation—sometimes resulting in hundreds of thousands or even millions in accelerated deductions.
However, with power comes complexity. Improper use or missed elections can result in lost deductions or compliance risks, so accuracy and professional guidance are critical.
Conclusion
Yes, it is possible to correct a missed bonus depreciation opportunity, but you may not need to amend a tax return to do it. Filing Form 3115 is the IRS-approved method for adjusting depreciation errors or changes, and working with experts like CSSI can ensure it’s done right.
Whether you’re considering bonus depreciation for a new acquisition or wondering if you missed opportunities in prior years, we’re here to help. At CSSI, we specialize in engineering-based cost segregation studies that maximize depreciation benefits and uncover hidden tax savings—safely, accurately, and with full audit support.
Ready to unlock more deductions? Let’s talk about how bonus depreciation and cost segregation can work for you.
