Bonus Depreciation
Bonus depreciation is a tax provision that lets businesses deduct a large percentage — currently 100% — of the cost of qualifying equipment and property in the year it's placed in service, rather than spreading deductions over the asset's useful life. The One Big Beautiful Bill Act restored 100% bonus depreciation for property acquired and placed in service after January 19, 2025, reversing the TCJA phase-down (which had dropped the rate to 40% in 2025 before the restoration). For a business purchasing a $300,000 piece of equipment, the difference between 100% bonus and the prior 40% phase-down is $180,000 in additional first-year deductions — potentially $54,000–$63,000 in federal tax savings at the 30–35% bracket. Bonus depreciation is especially powerful for capital-intensive businesses: construction, manufacturing, transportation, and commercial real estate with personal property components.
Current Law (2026)
For most qualifying business property acquired and placed in service after January 19, 2025, current law allows 100% bonus depreciation in 2026.
| Property timing | Rate | Status |
|---|---|---|
| Acquired and placed in service after Jan. 19, 2025 | 100% | Current law |
| Acquired before Jan. 20, 2025 and placed in service in 2025 | Generally 40% | Historical transition rule |
| Certain long-production-period property placed in service after 2024 and before Jan. 20, 2025 | 60% | Historical transition rule |
Legal Authority
- 26 U.S.C. § 168 — Accelerated cost recovery system
- 26 U.S.C. § 167 — Depreciation
- IRC Section 168(k) — Special depreciation allowance
How It Works
Bonus depreciation under IRC § 168(k) applies to tangible personal property with a MACRS recovery period of 20 years or less — equipment, machinery, vehicles, computers, furniture, fixtures, and similar business assets — plus Qualified Improvement Property (QIP), the interior tenant improvements and renovations that received a 15-year MACRS life in the CARES Act (2020). Since the Tax Cuts and Jobs Act of 2017, used property also qualifies, not just new purchases, as long as the taxpayer hasn't previously depreciated the asset. Buildings, structural components, land, and inventory are excluded. Unlike Section 179, which requires an affirmative election on Form 4562, bonus depreciation is automatic — it applies to all qualifying property placed in service during the year unless you specifically elect out, class by class. An election-out makes sense when you expect higher income in future years, are in a low-tax year, or when large first-year deductions would reduce the QBI deduction more than they save in income taxes.
Section 179 and bonus depreciation both produce first-year deductions but operate differently in ways that matter for larger purchases. Section 179 is capped at $2,560,000 per year and cannot create a business loss — deductions are limited to business taxable income. Bonus depreciation has no dollar cap and can generate a net operating loss that carries forward indefinitely. A business buying $10 million in equipment can stack both: apply Section 179 to the first $2,560,000, then let bonus depreciation cover the remaining $7,440,000, all deducted in year one with no income limitation. The Tax Cuts and Jobs Act originally authorized 100% bonus depreciation through 2022, then scheduled phase-downs to 80% (2023), 60% (2024), 40% (2025), and 20% (2026). The One Big Beautiful Bill Act reversed the phase-down, restoring 100% for property acquired and placed in service after January 19, 2025 — meaning a business buying $300,000 of equipment in 2026 can deduct the full amount immediately, generating $84,000–$105,000 in federal tax savings depending on bracket, vs. $33,600–$42,000 under the 40% phase-down rate.
How It Affects You
If you're buying equipment in 2026: 100% bonus depreciation applies to qualifying property acquired and placed in service after January 19, 2025. A $100,000 equipment purchase placed in service this year generates a $100,000 first-year deduction — zero depreciation spread over the MACRS schedule. The asset must be placed in service (operational, not just purchased) before December 31 to count for 2026. Equipment ordered in November and received in January doesn't qualify for 2026 depreciation.
If you're deciding between bonus depreciation and Section 179: Most advisors recommend using Section 179 first on targeted assets (up to the $2,560,000 limit), then letting bonus depreciation cover the rest automatically. Section 179 can't create a loss (limited to taxable income); bonus depreciation can create a net operating loss you can carry forward. For businesses with healthy profits, the tax result is identical. For businesses with tight margins, the interaction matters — bonus depreciation can create an NOL that offsets future income, while Section 179 excess carries forward at zero interest. Also note depreciation recapture: when you later sell the asset, prior bonus deductions come back as ordinary income to the extent of gain.
If you're improving a commercial tenant space (QIP): Qualified improvement property — interior improvements to non-residential buildings — has a 15-year MACRS life and qualifies for 100% bonus depreciation. Restaurant buildouts, retail renovation, office improvements, and other commercial leasehold improvements can all be expensed immediately in 2026. This is one of the most valuable applications for businesses that lease space and periodically renovate.
If your business does significant R&D: Note the §174 disconnect. Equipment purchased for R&D can still qualify for bonus depreciation under § 168(k). But the R&D costs themselves (wages, contract research, certain materials) must be amortized over 5 years under the current § 174 rule, no fix yet enacted. If your "equipment" purchase includes embedded software developed in-house, distinguish carefully between the hardware (bonus depreciation eligible) and the software development costs (§ 174 amortization required).
State Variations
Bonus depreciation is a federal provision, but state income tax conformity varies significantly — and the non-conforming states impose a meaningful tax cost on businesses that rely on the federal deduction:
California — does not conform to bonus depreciation: California has explicitly decoupled from federal bonus depreciation under IRC § 168(k). A California business that takes a $500,000 bonus depreciation deduction federally must add that amount back on the CA return and instead depreciate the asset over its normal MACRS useful life. For a $100,000 piece of equipment with a 5-year MACRS life, CA would allow roughly $20,000 in year-one depreciation while the federal return shows $100,000. The resulting CA state taxable income is $80,000 higher — at CA's 8.84% corporate rate or up to 13.3% individual rate, that's a $7,072–$10,640 additional state tax bill in year one. CA eventually allows the same total depreciation over the asset's life, so it's timing, not permanent — but the cash-flow difference is real and can be substantial for capital-intensive California businesses.
New Jersey — does not conform to bonus depreciation: NJ uses its own depreciation rules modeled on pre-TCJA federal law and does not recognize federal bonus depreciation amounts. NJ businesses must separately track federal and NJ book value for depreciable assets, adding compliance complexity.
Pennsylvania: PA has its own depreciation rules and does not conform to federal bonus depreciation schedules. PA generally requires add-back of excess depreciation with slower recognition.
New York: NY generally conforms to federal bonus depreciation for corporate taxpayers but has historically required add-back for individual taxpayers (partners and S-corp shareholders whose business income flows to their personal return). NY conformity has evolved and should be confirmed for the current year.
Most other states: The majority of states with income taxes conform fully to the federal bonus depreciation rules, allowing the same accelerated deduction on state returns. For businesses operating in multiple states, pro-rating the CA/NJ add-back by the percentage of income apportioned to those states is required.
Practical planning implication: A business owner in California or New Jersey purchasing $500,000 of equipment in 2026 should model both federal and state tax impact. The federal savings (say, $175,000 at the 35% bracket) are partially offset by additional state taxes in year one due to non-conformity. The net benefit is still very positive — but the state tax hit in California can surprise business owners who only plan around the federal return.
Implementing Regulations
- 26 CFR Part 1 — Income tax regulations (sections 1.167/1.168: depreciation elections, MACRS rules, additional first-year depreciation; section 1.179: section 179 expensing; amortization in excess of depreciation)
- 26 CFR 1.168(k)-0 — Bonus depreciation table of contents
- 26 CFR 1.168(k)-1 — Additional first year depreciation deduction (the original bonus depreciation regulations: qualified property definition, election out, computation, AMT relief)
- 26 CFR 1.168(k)-2 — Additional first year depreciation for property acquired and placed in service after September 27, 2017 (the TCJA-era 100% bonus depreciation regulations: used property eligibility, transition rules, partnership and consolidated group rules)
Pending Legislation (119th Congress)
- HR 1990 (Rep. Estes, R-KS) — American Innovation and R&D Competitiveness Act of 2025. Would let firms immediately deduct research costs or amortize certain capitalized R&E over 60 months and align deduction rules with the R&D tax credit. Status: Introduced.
Recent Developments
- 100% bonus depreciation restored by One Big Beautiful Bill Act: The phase-down schedule under the TCJA — which had reduced bonus depreciation from 100% (2018-2022) to 80% (2023), 60% (2024), and 40% (2025 for property before Jan. 20, 2025) — was reversed by legislation signed in 2025. Property acquired and placed in service after January 19, 2025 qualifies for 100% first-year expensing. This is one of the most significant near-term tax changes for businesses purchasing equipment, vehicles, or qualified improvement property in 2026.
- Planning window is now open for 2026 capital investment: With both 100% bonus depreciation and the $2,560,000 Section 179 expensing limit available in 2026, businesses can fully deduct virtually any business equipment purchase in the year of acquisition. For tax planning, the key question is whether to use Section 179 (which preserves flexibility on which assets get the deduction and allows carry-forwards) or rely on automatic bonus depreciation. Most advisors recommend using 179 first up to the income limit, then bonus depreciation.
- Qualified improvement property (QIP) benefits most from restoration: QIP — interior improvements to non-residential buildings — was given a 15-year depreciation life in the CARES Act (2020), making it eligible for bonus depreciation. Restaurant, retail, and office tenants making leasehold improvements can now deduct 100% of QIP costs immediately in 2026, rather than depreciating over 15 years. This is a significant benefit for the hospitality and retail sectors.
- Interaction with the §174 R&D amortization problem: While bonus depreciation is favorable in 2026, businesses with significant R&D spending still face mandatory 5-year amortization under IRC § 174 — no fix has passed as of early 2026. Companies in technology and manufacturing need to track these two regimes separately: equipment and QIP qualify for bonus depreciation; R&D expenditures do not and must be amortized even if the underlying activity directly supports depreciable equipment.