Bonus Depreciation Phaseout 2024-2027: What Arizona Businesses Need to Know

Understanding the Bonus Depreciation Phaseout

Arizona business owners in Phoenix, Mesa, and Tucson face a critical tax planning deadline as bonus depreciation begins its scheduled phaseout. This tax benefit, which has allowed businesses to immediately deduct a large percentage of equipment costs, is decreasing significantly through 2027.

The Tax Cuts and Jobs Act of 2017 temporarily increased bonus depreciation to 100%, allowing businesses to deduct the full cost of qualifying equipment in the year of purchase. However, this benefit is now phasing out on a predictable schedule that every Arizona business owner needs to understand.

For 2024, bonus depreciation has dropped to 80% of equipment costs. In 2025, it decreases further to 60%.

By 2026, only 40% will be deductible, followed by 20% in 2027. After 2027, bonus depreciation is scheduled to be eliminated entirely unless Congress acts to extend it.

This phaseout represents a significant change in tax strategy for Phoenix, Mesa, and Tucson businesses that have relied on bonus depreciation to reduce tax liability when purchasing equipment.

What Equipment Qualifies for Bonus Depreciation in Arizona

Qualifying Property Requirements

To qualify for bonus depreciation, equipment must meet specific IRS requirements. The property must be new or used (a major change from previous rules that only allowed new equipment), have a recovery period of 20 years or less, and be placed in service during the tax year you're claiming the deduction.

For Phoenix construction companies, this includes excavators, bulldozers, dump trucks, concrete mixers, and scaffolding systems.

Mesa manufacturing businesses can claim bonus depreciation on CNC machines, industrial presses, assembly line equipment, quality testing equipment, and material handling systems.

Tucson medical practices qualify for deductions on diagnostic imaging equipment, surgical instruments, examination tables, sterilization equipment, and practice management software.

Property That Doesn't Qualify

Not all business assets qualify for bonus depreciation. Buildings and structural components cannot be depreciated using bonus depreciation.

Land and land improvements don't qualify. Equipment purchased from related parties is excluded.

Property converted from personal to business use after acquisition doesn't qualify.

Understanding these distinctions is crucial for Phoenix, Mesa, and Tucson businesses planning equipment purchases and tax strategies.

The Financial Impact of the Phaseout on Arizona Businesses

2024: 80% Bonus Depreciation

A Phoenix construction company purchasing a $500,000 excavator in 2024 can immediately deduct $400,000 (80% of cost) under bonus depreciation. The remaining $100,000 would be depreciated over the equipment's normal recovery period.

For a business in the 25% effective tax bracket, this $400,000 deduction generates $100,000 in tax savings in year one.

This is a significant benefit that helps offset the equipment purchase cost and improves cash flow.

2025: 60% Bonus Depreciation

That same $500,000 excavator purchased in 2025 would only qualify for a $300,000 immediate deduction (60%). The first-year tax savings drop to $75,000—a $25,000 reduction in immediate tax benefits compared to 2024.

For Arizona businesses planning significant equipment investments, this $25,000 difference could be the cost of waiting just one year.

2026-2027: Rapid Decline

By 2026, bonus depreciation drops to just 40%, providing only a $200,000 deduction on that $500,000 excavator—$50,000 in tax savings.

In 2027, at 20% bonus depreciation, the immediate deduction falls to just $100,000, generating only $25,000 in tax savings.

Mesa and Tucson businesses that delay equipment purchases from 2024 to 2027 would forfeit $75,000 in immediate tax benefits—a compelling reason to accelerate equipment investments before the phaseout deepens.

Section 179 Deduction: Your Backup Strategy

How Section 179 Differs from Bonus Depreciation

While bonus depreciation is phasing out, Section 179 remains a valuable tax strategy for Phoenix, Mesa, and Tucson businesses. Section 179 allows businesses to deduct up to $1,160,000 in equipment purchases for 2024 (adjusted annually for inflation).

Unlike bonus depreciation, Section 179 has income limitations—your deduction cannot exceed your business's taxable income for the year. Bonus depreciation had no income limitation.

Section 179 begins phasing out once total equipment purchases exceed $2,890,000 in a year. Most small to medium Arizona businesses never hit this threshold.

Section 179 can be used for new or used equipment, but the property must be purchased and placed in service during the tax year.

Combining Section 179 and Bonus Depreciation

Smart tax planning for Arizona businesses involves using both deductions strategically. You can take Section 179 first (up to the $1,160,000 limit and your income threshold), then apply bonus depreciation to the remaining equipment cost.

For example, a Tucson medical practice purchasing $1,500,000 in diagnostic equipment in 2024 could deduct $1,160,000 under Section 179, then apply 80% bonus depreciation to the remaining $340,000 ($272,000 additional deduction). Total first-year deduction: $1,432,000.

This combination allows Arizona businesses to maximize immediate tax benefits even as bonus depreciation phases out.

Strategic Equipment Purchase Timing for Arizona Businesses

Accelerate Planned 2025-2026 Purchases into 2024

If you're a Phoenix, Mesa, or Tucson business planning equipment purchases in the next 2-3 years, moving those purchases into 2024 captures the 80% bonus depreciation before it drops further.

Even if you need to finance the equipment at current interest rates, the tax savings from higher bonus depreciation often outweigh the financing costs.

A $300,000 equipment purchase generates $60,000 in tax savings in 2024 versus $45,000 in 2025—enough to offset interest costs on financing.

Consider Sale-Leaseback Arrangements

Arizona businesses that purchased equipment in previous years without bonus depreciation could consider sale-leaseback arrangements. You sell equipment to a leasing company, then lease it back for continued use.

The leasing company gets depreciation benefits, often resulting in lower lease payments than traditional financing.

This strategy can free up capital tied up in existing equipment while maintaining operational access to necessary machinery.

Year-End Purchase Strategies

Both Section 179 and bonus depreciation require equipment to be "placed in service" by December 31 to qualify for the current year's deduction.

Phoenix, Mesa, and Tucson businesses should plan equipment purchases early enough to ensure delivery and installation before year-end.

For large equipment with long lead times, ordering in October or November ensures you don't miss the deadline. Many equipment dealers and financing companies see increased activity in Q4 as businesses rush to meet year-end deadlines.

Equipment Financing and Tax Planning

How Financing Affects Depreciation Timing

A common misconception is that you can only depreciate equipment once it's paid off. This is false.

Equipment financed through loans or leases can be depreciated immediately when placed in service, regardless of payment schedule.

This means Phoenix, Mesa, and Tucson businesses can capture bonus depreciation tax benefits in year one while spreading equipment costs over 3-7 years through financing. The immediate tax savings can actually be used to make equipment payments, creating a powerful cash flow strategy.

True Leases vs. Conditional Sales

The tax treatment of leased equipment depends on whether the IRS classifies it as a "true lease" or a "conditional sale."

True leases allow you to deduct lease payments as operating expenses. Conditional sales (leases structured as purchase agreements) allow you to claim depreciation and interest deductions.

Work with your Arizona tax advisor and equipment financing specialist to structure financing in the most tax-advantaged way for your specific situation.

State Tax Considerations for Arizona Businesses

Arizona Conformity to Federal Tax Changes

Arizona generally conforms to federal tax law for depreciation purposes, meaning bonus depreciation phaseout affects both federal and Arizona state tax calculations. However, Arizona has made selective modifications to federal tax law in the past.

Phoenix, Mesa, and Tucson businesses should consult with Arizona tax professionals to ensure they understand current state conformity rules and any Arizona-specific equipment depreciation provisions.

Property Tax Implications

While income tax depreciation is phasing out, don't forget about Arizona property taxes on business equipment. Many Arizona counties assess personal property taxes on business equipment and machinery.

Property tax rates and assessment methods vary by county. Maricopa County (Phoenix and Mesa) and Pima County (Tucson) have different assessment practices that can affect your total tax burden when purchasing equipment.

Action Steps for Arizona Businesses

Immediate Actions for 2024

Review your equipment needs for 2024-2026 and identify purchases that could be accelerated into 2024.

Meet with your tax advisor to model the tax impact of different purchase timing scenarios.

Contact equipment dealers to confirm delivery timelines for year-end purchases. Arrange financing pre-approval to ensure quick transaction completion.

Calculate your Section 179 capacity based on projected 2024 income.

Long-Term Tax Planning

Develop a multi-year equipment replacement and tax planning strategy.

Consider how depreciation changes affect your equipment ROI calculations. Explore cost segregation studies for real property to maximize depreciation deductions.

Build relationships with equipment financing specialists who understand tax-advantaged financing structures.

Conclusion: Act Now to Maximize Tax Benefits

The bonus depreciation phaseout represents one of the most significant tax changes affecting Phoenix, Mesa, and Tucson businesses in recent years. With the deduction dropping from 80% in 2024 to eventual elimination, the window for maximizing equipment tax benefits is closing rapidly.

Arizona businesses that act strategically—accelerating necessary equipment purchases, combining Section 179 and bonus depreciation effectively, and working with experienced tax and financing advisors—will save tens of thousands to hundreds of thousands of dollars in taxes.

Don't let the phaseout deadline pass without taking advantage of current tax benefits. Review your equipment needs, run the numbers with your tax advisor, and make informed decisions that optimize both your operational capabilities and tax situation.

Ready to discuss equipment financing strategies that maximize your remaining bonus depreciation benefits? Contact Equipment Finance Academy today for expert guidance on tax-advantaged equipment financing for Arizona businesses in Phoenix, Mesa, and Tucson.