Electing Out of Bonus Depreciation by Asset Class
Practical decisions for business owners and real estate owners.
The decision
Electing out of bonus depreciation is generally a decision for a class of property placed in service during a tax year, not a choice made separately for each asset. Business owners and real estate owners should review the full asset list before deciding that a smaller current deduction is better.
Published · AE Tax Advisors Team
Start with a list of assets, not a target deduction
A projection may suggest that a business owner needs only part of a large depreciation deduction this year. That does not mean the owner can simply choose a desired percentage of otherwise applicable bonus depreciation. The Form 4562 instructions explain the election out by class of property and the statement accompanying a timely filed return, including extensions. Revoking the election generally requires IRS consent. Confirm the rules applicable to the filing year before making the election.
Create a list by taxpayer, placed-in-service year, asset description, recovery period, and basis. Include equipment purchases outside the cost segregation project. A five-year asset in a property study and five-year equipment elsewhere in the same taxpayer’s business can belong in the same election review. Keep separate taxpayers separate; an owner’s personal preference does not replace an entity-level filing decision.
Compare at least three planning outputs
Ask for a current-year federal projection, a multi-year depreciation schedule, and a state reconciliation. Keep the federal tax benefit separate from any state benefit. Show deductions that are currently usable and those carried forward under an applicable limitation. Include planned purchases and an expected sale year in the assumptions rather than assuming that next year’s income will match this year’s.
A larger deduction may free cash now. A smaller deduction may retain deductions for later years. Neither outcome is automatically better. The useful comparison is the timing and usability of the deductions against the owner’s expected income and cash needs, with the assumptions visible. A projection that reports only the largest first-year number cannot answer that question.
A class-level example
Consider a company with $70,000 of five-year components identified in a building study and $30,000 of other five-year equipment placed in service in the same year. The company should evaluate the relevant class as a whole rather than asking to turn off bonus only for the building components. If its advisor models an election out, the workpapers should identify both purchases and the regular depreciation treatment that would follow.
The $100,000 total is hypothetical basis for the example. It is not a prediction of a deductible amount or a statement that every item qualifies for bonus. Classification, acquisition requirements, elections, and limitations still need to be resolved. Separately list any assets for which eligibility is uncertain.
Record the decision before filing
- Export the fixed-asset list and identify each affected class.
- Retain a version of the projection with bonus and a version reflecting the proposed election.
- List assumptions about future profits, property sales, and state treatment.
- Record who approved the filing choice and who prepares the election statement.
- Check that the return and depreciation software reflect the same choice.
Coordinate with partners and future preparers
If a partnership or S corporation owns the assets, circulate a clear explanation of the entity’s decision to the owners who need it for their projections. Keep the election statement with permanent tax records so a future preparer does not treat the absence of bonus as an error. When the decision changes after filing, request a procedural review before amending; the original election is a tax position with its own correction rules.
Use the cost segregation calculator for an explicitly limited scenario and business owner tax planning for a projection covering the rest of the return.
Source and scope
IRS Form 4562 instructions: electing out of the special depreciation allowance. Source checked September 26, 2026. Examples are hypothetical. This guide is general education, not a conclusion about your return. Read our editorial policy.
Related Reading
Talk Through Your Situation
Every situation turns on its own facts. Schedule a discovery call and we will walk through what applies to you, what it is worth, and what it would take to put it in place.