Understanding the Bonus Depreciation Phaseout
Bonus depreciation has been a powerful tax incentive for Phoenix, Mesa, and Tucson businesses purchasing equipment, allowing immediate write-offs of a significant portion of equipment costs.
However, this valuable deduction is being phased out over the next few years, creating urgency for Arizona businesses to act strategically.
The phaseout schedule reduces bonus depreciation from 80% in 2023 to 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and beyond.
For a $100,000 equipment purchase, this means the immediate tax deduction drops from $80,000 in 2023 to just $60,000 in 2024, representing $20,000 less in first-year deductions.
Understanding these changes is critical for Phoenix, Mesa, and Tucson business owners planning equipment investments. The time to act is now, before these benefits disappear entirely.
What is Bonus Depreciation?
The Basics
Bonus depreciation allows businesses to immediately deduct a percentage of equipment costs in the year of purchase, rather than depreciating the full amount over multiple years.
This accelerated depreciation provides immediate tax relief and improved cash flow.
For Arizona businesses in the 25% federal tax bracket, 80% bonus depreciation on a $100,000 equipment purchase means $20,000 in immediate federal tax savings ($80,000 x 25%).
Combined with Arizona's corporate tax benefits, the total tax savings can reach $24,000-$26,000 in year one.
Qualifying Equipment
Bonus depreciation applies to most tangible equipment with a recovery period of 20 years or less. This includes construction equipment, manufacturing machinery, medical devices, restaurant equipment, technology and computers, vehicles over 6,000 pounds, and specialized industry equipment.
Both new and used equipment qualify, provided it's new to your business. This makes bonus depreciation valuable for Phoenix, Mesa, and Tucson businesses purchasing pre-owned equipment at competitive prices.
The Phaseout Schedule: What to Expect
2024: 60% Bonus Depreciation
Equipment placed in service during 2024 qualifies for 60% bonus depreciation. For Mesa construction companies purchasing a $200,000 excavator, this means $120,000 in immediate deductions.
At 25% tax rate, that's $30,000 in federal tax savings plus Arizona state benefits.
2025: 40% Bonus Depreciation
The deduction drops to just 40% in 2025. That same $200,000 excavator now provides only $80,000 in immediate deductions, reducing federal tax savings to $20,000.
That's $10,000 less benefit than purchasing in 2024.
2026: 20% Bonus Depreciation
By 2026, only 20% bonus depreciation remains. The immediate deduction on $200,000 equipment falls to just $40,000, providing only $10,000 in federal tax savings.
The benefit has shrunk by 75% compared to 2023 levels.
2027 and Beyond: Zero Bonus Depreciation
Starting in 2027, bonus depreciation disappears entirely unless Congress extends it. Businesses will return to traditional depreciation schedules, spreading deductions over 3-7 years for most equipment.
The immediate tax relief that Phoenix, Mesa, and Tucson businesses have enjoyed will be gone.
Impact on Arizona Businesses
Construction and Contractors
Phoenix area construction companies face equipment costs of $150,000-$500,000 or more for excavators, loaders, and specialized equipment.
The phaseout means purchasing a $300,000 excavator in 2024 provides $45,000 in federal tax savings (60% x $300,000 x 25%), but waiting until 2025 reduces savings to just $30,000.
That's a $15,000 penalty for delaying the purchase one year.
Medical and Dental Practices
Mesa and Tucson healthcare providers investing in diagnostic equipment, surgical instruments, and practice technology typically spend $75,000-$250,000.
Bonus depreciation has made these investments more affordable by providing immediate tax relief.
As the phaseout continues, practices will need to carefully time equipment purchases or explore Section 179 deductions as an alternative.
Manufacturing and Industrial
Arizona manufacturers making capital investments in production equipment face the largest impact.
A $500,000 CNC machine purchased in 2024 provides $75,000 in federal tax savings, but the same purchase in 2027 would provide zero immediate deduction.
The difference could determine whether an investment makes financial sense.
Transportation and Logistics
Phoenix trucking and logistics companies purchasing commercial vehicles benefit significantly from bonus depreciation.
A semi-truck costing $150,000 purchased in 2024 provides $22,500 in federal tax savings.
As the phaseout continues, fleet expansion becomes more expensive from a tax perspective.
Strategic Response: Maximizing Tax Benefits
Accelerate Planned Purchases
If you're planning equipment purchases in the next 2-3 years, consider moving them forward to capture higher bonus depreciation percentages.
Equipment you'll need eventually should be purchased sooner rather than later to maximize tax benefits.
Mesa businesses with strong cash flow should evaluate their multi-year equipment needs and front-load purchases while substantial deductions remain available.
Leverage Equipment Financing
Equipment financing allows you to purchase and place equipment in service immediately while preserving working capital.
You capture the full bonus depreciation deduction in year one, even though you're paying for the equipment over 3-7 years.
For Tucson businesses with limited capital, financing enables them to make strategic equipment investments and capture tax benefits that would otherwise be lost.
Consider Section 179 Deductions
Section 179 allows businesses to deduct up to $1,160,000 in equipment purchases annually (for 2024), regardless of bonus depreciation changes.
However, Section 179 is limited by taxable income—you can't use it to create a loss.
Bonus depreciation has no income limitation, making it valuable for businesses with varying profitability. Phoenix businesses should use both strategies in combination for maximum benefit.
Plan for Used Equipment Purchases
One advantage of bonus depreciation is that used equipment qualifies, provided it's new to your business.
Arizona businesses can purchase quality used equipment at 30-50% below new prices while still capturing valuable bonus depreciation deductions.
This strategy provides double savings: lower purchase price and immediate tax relief.
Equipment Financing and Tax Planning
Timing Equipment Delivery
Equipment must be "placed in service" during the tax year to qualify for that year's bonus depreciation.
This means the equipment is delivered, installed, and ready for use, not just ordered or paid for.
Mesa businesses planning year-end equipment purchases should allow adequate time for delivery and installation to ensure they capture current-year deductions.
Documentation Requirements
Proper documentation is essential for claiming bonus depreciation. Maintain delivery receipts and bills of sale, installation and setup records, and photos or inspection reports showing equipment in service.
Phoenix area businesses should work with their accountants to ensure all documentation requirements are met.
Working with Arizona Equipment Financing Specialists
Local Expertise Matters
Arizona businesses benefit from working with equipment financing specialists who understand local market conditions, industry-specific needs, and tax planning strategies.
Local lenders in Phoenix, Mesa, and Tucson can expedite approvals and customize solutions for your specific situation.
Tax-Optimized Financing Structures
Experienced equipment finance professionals can structure transactions to maximize tax benefits while managing cash flow effectively.
This includes timing purchases for optimal tax treatment, structuring payments to align with business cycles, and combining multiple equipment purchases for efficiency.
Conclusion: Act Before Benefits Disappear
The bonus depreciation phaseout creates urgency for Phoenix, Mesa, and Tucson businesses planning equipment investments.
Every year you wait means substantially smaller tax deductions and higher effective equipment costs.
Smart Arizona businesses are accelerating planned purchases, leveraging equipment financing to preserve capital, and working with tax advisors to maximize remaining benefits.
Don't let this valuable tax incentive disappear without taking action. Evaluate your equipment needs, calculate potential tax savings, and make strategic investments while meaningful bonus depreciation remains available.
Ready to discuss equipment financing options that maximize your tax benefits? Contact Equipment Finance Academy today to explore financing solutions tailored for Phoenix, Mesa, and Tucson businesses.
Michael Chen, CPA
Equipment financing specialist with years of experience helping businesses acquire the equipment they need to grow and succeed.
