Written by Sam Brotman, J.D., LL.M., MBA
Updated June 1, 2026  ·  12 min read

What Bonus Depreciation Is (and What It Is Not)

Bonus depreciation under IRC §168(k) allows businesses to deduct a percentage of the cost of qualifying property in the year it is placed in service, instead of spreading the deduction across the asset’s useful life.

Normally, when a business purchases equipment or other capital assets, the deduction is spread over years — five, seven, fifteen, or more — under the Modified Accelerated Cost Recovery System (MACRS). Bonus depreciation accelerates that deduction to year one. For a business generating significant taxable income, that is a material difference in cash flow and effective tax rate.

Qualifying property under §168(k) is MACRS property with a recovery period of 20 years or less. That covers most business equipment — machinery, computers, office furniture, fixtures, and certain building improvements such as qualified improvement property (QIP). It also covers used property acquired from an unrelated party, which has been the rule since the Tax Cuts and Jobs Act (TCJA) took effect in 2018. The property must be new to the taxpayer — it does not need to be new to the world.

What bonus depreciation does not cover: land and buildings themselves. The building structure and land are not eligible. But the components of a commercial building — electrical systems, HVAC, plumbing, finishes, personal property — can be reclassified through a cost segregation study into shorter recovery periods that do qualify. That is a separate strategy and the highest-dollar application for real estate investors, covered in detail below.

There is one other thing bonus depreciation can do that Section 179 cannot: it can create or increase a net operating loss (NOL). That NOL can then be carried forward to offset future income. For capital-intensive businesses in early stages, or businesses that had an unusually large equipment purchase in a low-income year, that is a meaningful planning tool.

The Phase-Down: Where Bonus Dep Stands Right Now

The TCJA set 100% bonus depreciation for property placed in service between September 27, 2017 and December 31, 2022. After 2022, it phases down by 20 percentage points per year under current law.

Under current law, if you placed a $500,000 piece of equipment in service in 2025, your first-year deduction is $200,000 (40%). The remaining $300,000 depreciates over the asset’s MACRS recovery period. If the OBBBA becomes law as written, that same $500,000 placed in service on January 1, 2025 or later produces a $500,000 first-year deduction. The 60% gap is not lost — it is potentially recoverable through an amended return.

The key date the OBBBA uses is property placed in service after December 31, 2024. “Placed in service” has a specific meaning under Treasury regulations — the property must be ready and available for its intended use. Ordered and paid for is not sufficient. If the equipment did not arrive and become operational in 2025, it does not qualify for the 2025 retroactive restoration.

The One Big Beautiful Bill: What Changes

The House passed the One Big Beautiful Bill Act (OBBBA) in May 2025. The Senate is considering the bill in 2026. If enacted as passed, it restores 100% bonus depreciation for property placed in service after December 31, 2024, and makes that rate permanent.

The OBBBA’s bonus depreciation provision is straightforward: it amends IRC §168(k) to treat the applicable percentage as 100% for property placed in service after December 31, 2024, and removes the phase-down schedule entirely going forward. There is no sunset. The practical effect is that 100% first-year expensing returns as a permanent feature of the tax code.

The retroactive effective date matters. The OBBBA would apply to property placed in service beginning January 1, 2025 — not the date of enactment. That creates a planning opportunity for business owners who already placed property in service in 2025 at 40%: if the bill becomes law, those owners could potentially claim the additional 60% through an amended 2025 return (Form 1040-X or 1120-X depending on entity type) or, in some situations, through catch-up depreciation on the 2026 return. The mechanics depend on the final statutory language and any IRS guidance issued after enactment.

The OBBBA also includes significant changes to Section 179 expensing limits. The reported provision increases the Section 179 dollar cap substantially above the 2025 level of $1.16 million. The exact amount in the final enacted version, if any, should be confirmed against the statutory text once the Senate completes its work. We will update this page when final legislation is signed.

As of June 2026, the bill has not been enacted. Business owners should plan on the basis of current law unless and until the OBBBA is signed. But those who placed significant property in service in 2025 should preserve documentation and timing evidence now — that is what drives the retroactive claim if the bill passes.

Section 179: The Companion Provision

Section 179 under IRC §179 is an annual expensing election that lets businesses deduct the cost of qualifying property immediately, up to a dollar cap — $1.16 million in 2025. It operates differently from bonus depreciation in ways that matter for planning.

The most important difference: Section 179 cannot create or increase a net operating loss. You can only deduct Section 179 up to the business’s taxable income from active trades or businesses. Bonus depreciation has no such limit — it can push your taxable income below zero. For a profitable business with more than enough income to absorb a large deduction, Section 179 works fine. For a business with thin margins or a capital-intensive year, bonus depreciation is the more powerful tool.

Section 179 also phases out dollar-for-dollar once total property placed in service during the year exceeds $2.89 million (2025). At $4.05 million of total property placed in service, the Section 179 deduction reaches zero entirely. Bonus depreciation has no phase-out. For large capital expenditure years, bonus depreciation is the only realistic option once the Section 179 ceiling is gone.

On the other hand, Section 179 can be elected on a property-by-property basis. That flexibility matters when you want to be precise about which assets generate the current-year deduction and which assets you want on the depreciation schedule for future years.

The two elections can be stacked. The common approach is to apply Section 179 first, up to the taxable income limit, and then apply bonus depreciation to any remaining basis — including any portion that would create an NOL if the taxpayer has a use for that loss. Each business’s optimal combination depends on income level, entity type, and state considerations.

The Vehicle Deduction (The >6,000 lb Rule)

Vehicles over 6,000 lbs gross vehicle weight rating (GVWR) avoid the luxury auto depreciation limits under IRC §280F and can use Section 179 up to $28,900 (2025) or bonus depreciation on the full purchase price.

IRC §280F caps first-year depreciation on passenger automobiles at $12,200 in 2025. That cap exists to prevent abusive deductions on luxury cars used for both personal and business purposes. It does not apply to vehicles over 6,000 lbs GVWR — those are treated as business property rather than passenger automobiles, and are subject to the Section 179 cap for heavy SUVs of $28,900 under §179(b)(5)(B).

The practical numbers under 2025 current law for a $75,000 SUV over 6,000 lbs used 100% for business: Section 179 produces a $28,900 deduction. The remaining $46,100 basis is eligible for 40% bonus depreciation, producing another $18,440. Combined first-year deduction: $47,340. If the OBBBA becomes law and 100% bonus depreciation is restored, that same $75,000 SUV produces a $75,000 first-year deduction.

Vehicles commonly qualifying under the >6,000 lb GVWR rule include Ford F-250 and heavier, Chevrolet Suburban, GMC Yukon XL, RAM 2500 and heavier, most heavy-duty pickups, and the Tesla Cybertruck. Always verify the GVWR on the manufacturer’s label inside the driver-side door before claiming this treatment — the vehicle spec sheet and the door label sometimes differ, and the IRS uses the label.

One requirement that applies regardless of vehicle weight: the vehicle must be used more than 50% for business. If business use is less than 50%, the vehicle does not qualify for Section 179 at all. If business use is more than 50% but less than 100%, both the Section 179 deduction and any bonus depreciation are prorated to the business-use percentage. Personal use is not deductible.

One more thing: if business use of a listed property vehicle drops below 50% in a subsequent year, a depreciation recapture calculation is triggered. The deductions taken in excess of what straight-line depreciation would have produced become income in the year business use dropped. This is not a reason to avoid the deduction — it is a reason to document business use carefully every year while the vehicle is in service and in-service percentages are relevant.

Cost Segregation + Bonus Depreciation: The Real Estate Play

A cost segregation study reclassifies portions of commercial real estate from 39-year (nonresidential) or 27.5-year (residential) property into 5-, 7-, and 15-year property. Those reclassified components then qualify for bonus depreciation.

The building structure itself does not qualify for bonus depreciation — it has a 39-year recovery period and is outside the scope of §168(k). But a significant percentage of a commercial building’s cost consists of components with shorter recovery periods: personal property (equipment, furniture, fixtures), 15-year land improvements (parking lots, landscaping, certain exterior improvements), and 5-year or 7-year personal property components embedded in the building’s construction cost. A cost segregation study is an engineering-based analysis that identifies and documents these components.

The numbers are significant. For a $2 million commercial building, a cost segregation study might reclassify $300,000 to $500,000 into shorter-lived property. Under current law at 40% bonus depreciation, that produces a $120,000 to $200,000 first-year deduction that would otherwise not exist. At 100% bonus depreciation (current law through 2022, and potentially restored by the OBBBA), the same study produces a $300,000 to $500,000 first-year deduction. Against a 37% federal marginal rate, that is $111,000 to $185,000 in federal tax savings in year one.

Cost segregation is particularly valuable for: commercial buildings placed in service or acquired in the last few years while bonus depreciation rates were high; buildings being acquired now with the possibility of 100% restoration under the OBBBA; and real estate investors in pass-through entities who can use the depreciation against other passive income under §469. The passive activity rules matter — if the investor is passive and has no other passive income to absorb the loss, the deduction suspends until passive income exists or the property is sold.

The cost of the study runs roughly $5,000 to $20,000 depending on building size and complexity. The study pays for itself when the deductions it generates are compared against the study cost. For any commercial acquisition above $500,000, a cost segregation study is worth analyzing on the numbers before you close.

California Does Not Conform — What That Means For You

California’s position on bonus depreciation is not an oversight or a phase-in delay — it is a deliberate policy choice the state has maintained consistently. California generally follows federal law for income tax purposes, but it has specifically decoupled from the bonus depreciation provisions of §168(k). California also does not conform to the TCJA’s 100% rate, and it does not conform to any of the subsequent phase-down rates.

What California does is require taxpayers to compute depreciation using California’s own rules, which in most cases produce a smaller first-year deduction and larger deductions in later years. The result is a timing difference — the California deduction eventually catches up, but not in year one. For a business with meaningful California taxable income, that timing difference has a real cost: you pay California tax sooner than you otherwise would have.

California does generally conform to Section 179, with its own caps that may differ from federal. That is worth checking in the current year, particularly if the OBBBA’s changes to Section 179 are enacted federally but not adopted by California.

The practical takeaway: run the federal and California analysis separately. The federal deduction and the California deduction are different numbers on different schedules. A transaction that looks extremely efficient at the federal level may be less efficient after California conformity adjustments. This is not a reason to avoid the strategy — it is a reason to model both states before you commit.

Planning Before Year-End: What to Act On Now

The single most important planning action for bonus depreciation is ensuring property is placed in service before December 31. Ordered and paid for is not enough — the property must be ready and available for use.

Equipment manufacturers and vendors frequently quote “placed in service” dates that are optimistic. If the equipment is still in transit, still being installed, or still awaiting commissioning on December 31, it does not qualify for that year’s deduction. For large equipment purchases near year-end, confirm installation and commissioning dates in writing from the vendor and document the placed-in-service date carefully.

If the OBBBA becomes law before the end of 2026, the planning analysis for the current year shifts materially. Business owners who were planning to defer equipment purchases to 2027 (when current law produces 0% bonus depreciation) should reconsider. If 100% bonus depreciation is permanent, the only question becomes whether the purchase makes business sense — the depreciation timing is no longer a factor in the decision to buy or lease, buy now or buy later.

For business owners who placed property in service in 2025 at the 40% rate: preserve your documentation now. If the OBBBA passes and creates a retroactive claim, the IRS will require the same placed-in-service documentation it always requires — delivery records, installation records, a log showing the asset was available for its intended business use. If that documentation does not exist, the retroactive claim will be difficult to support.

For pass-through entity owners: bonus depreciation deductions flow through to the individual owners on Schedule K-1. Whether those deductions are deductible at the individual level depends on passive activity rules under §469 and the at-risk rules under §465. If you are a passive investor in a real estate partnership that takes a large cost segregation deduction, that deduction does not necessarily flow to your 1040 in the current year. The rules are entity-specific and investor-specific. This is an area where tax counsel pays for itself before you file, not after.

Sam Brotman

Owner & Managing Attorney · J.D., LL.M. Taxation, MBA

Sam founded Brotman Law in 2013. His LL.M. in Taxation and background in both tax controversy and tax strategy means he works on both ends of these problems — the planning that avoids issues and the defense when the IRS raises them.

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