When a business purchases equipment, machinery, technology, or other qualifying assets, it generally cannot deduct the entire cost immediately under the regular depreciation rules. Instead, the cost is usually recovered over the asset's applicable recovery period.

Bonus depreciation can accelerate that process by allowing eligible businesses to claim an additional first-year depreciation deduction for qualifying property. This can potentially reduce taxable business income in the year the property is placed in service.

Because depreciation rules have changed significantly in recent years, business owners should pay close attention to the date property was acquired and placed in service.

How Bonus Depreciation Works

Regular depreciation generally spreads the cost of qualifying business property over its applicable recovery period. The Modified Accelerated Cost Recovery System (MACRS) is commonly used for federal tax purposes.

Bonus depreciation, officially called the additional first-year depreciation deduction, provides an additional deduction for qualifying property in the first year it is placed in service.

For eligible property acquired after January 19, 2025, the One Big Beautiful Bill Act restored a permanent 100% additional first-year depreciation deduction. This means qualifying property may potentially be fully deducted through bonus depreciation in the year it is placed in service, rather than recovering the cost over several years.

The deduction is generally reported on Form 4562, Depreciation and Amortization.

What Changed After the 2025 Tax Law?

The Tax Cuts and Jobs Act of 2017 significantly increased bonus depreciation, temporarily allowing 100% first-year depreciation for qualifying property acquired and placed in service after September 27, 2017.

Under the original TCJA schedule, the percentage was scheduled to decline beginning in 2023.

However, the One Big Beautiful Bill Act (OBBBA) changed that schedule. For qualifying property acquired after January 19, 2025, the law provides a permanent 100% additional first-year depreciation deduction.

There are special transition rules for certain property acquired before January 20, 2025. For example, some qualifying property acquired after September 27, 2017, and before January 20, 2025, and placed in service during 2025 may be subject to the previous 40% rate.

Therefore, the acquisition date and placed-in-service date should be reviewed carefully before calculating the deduction.

What Property Can Qualify?

Not every business asset automatically qualifies for bonus depreciation.

Generally, qualifying property must meet the requirements under Section 168(k). One important requirement is that the property generally must have a recovery period of 20 years or less under MACRS, although special categories and additional rules can apply. Certain property is specifically excluded or subject to different requirements.

Examples of potentially qualifying property may include certain:

Machinery and equipment

Computers and technology

Furniture and fixtures

Business-use vehicles

Certain qualified improvement property

Other depreciable property meeting the applicable requirements

The property generally must be placed in service before the deduction can be claimed.

A taxpayer may also elect not to claim the additional first-year depreciation deduction for qualifying property and instead use the applicable regular depreciation rules.

Bonus Depreciation and Business Vehicles

Vehicles require special attention because depreciation limitations can apply.

The tax treatment depends on factors such as the type of vehicle, its weight, acquisition date, business-use percentage, and whether the vehicle qualifies for the applicable depreciation rules.

For example, IRS guidance for passenger automobiles placed in service during 2025 provides a maximum first-year depreciation deduction of $20,200 when the vehicle qualifies for the Section 168(k) additional first-year depreciation deduction. If the special depreciation allowance does not apply, the first-year limitation is generally $12,200.

These rules are different from simply assuming that every vehicle can receive a full deduction. Business owners should review the vehicle-specific rules in IRS Publication 946 before claiming depreciation.

Bonus Depreciation vs. Section 179

Bonus depreciation and the Section 179 deduction can both provide accelerated deductions for qualifying business property, but they operate differently.

Section 179 generally has dollar limitations and is subject to a taxable-income limitation. Bonus depreciation generally does not operate under the same taxable-income limitation, although other tax rules can affect how the deduction is used.

There can also be important differences when business use of property changes.

For example, Section 179 property may be subject to depreciation recapture when business use falls to 50% or less. Depreciation recapture rules can also apply to property for which bonus depreciation was claimed, depending on the circumstances and subsequent disposition or use of the property.

Because the two deductions can produce different tax results, choosing between them—or determining whether to use both—should be based on the taxpayer's specific situation.

Don't Forget About State Taxes

Federal and state depreciation rules do not always match.

A business may qualify for 100% bonus depreciation on its federal return while its state does not fully conform to the federal treatment. In that situation, the business may need a separate depreciation calculation for state income tax purposes.

This can create additional bookkeeping and tax-preparation work, particularly for businesses operating in multiple states.

Before claiming a large federal depreciation deduction, business owners should determine whether their state follows the federal bonus depreciation rules.

What Is Depreciation Recapture?

Claiming accelerated depreciation can provide a substantial tax benefit, but it does not necessarily eliminate tax consequences when the property is later sold or its business use changes.

Depreciation recapture can require some previously claimed depreciation to be treated as income when qualifying property is disposed of or certain other conditions occur.

The rules can become particularly complicated for vehicles and other property subject to special depreciation provisions.

For this reason, businesses should maintain detailed records showing the property's purchase price, date acquired, date placed in service, business-use percentage, depreciation claimed, and eventual sale or disposition.

Is Bonus Depreciation Right for Your Business?

Bonus depreciation can be a valuable tax-planning tool when a business purchases qualifying property. The ability to accelerate deductions may reduce taxable income in the year an asset is placed in service and can improve short-term cash flow.

However, claiming the maximum deduction is not automatically the best strategy in every situation. The business's current income, future tax position, state tax rules, Section 179 options, business-use percentage, and future plans should all be considered.

Because depreciation rules can be complex and change over time, businesses should verify the applicable IRS rules for the specific tax year before filing Form 4562 or claiming a significant depreciation deduction.

 

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