168(k) Property Rules: Bonus Depreciation, Vehicle Caps, and Recapture

Bonus depreciation in 2026 splits into two very different rules depending on when you acquired the asset. For property acquired after January 19, 2025, the One, Big, Beautiful Bill Act (OBBBA) permanently restored the 100% first-year deduction under Section 168(k), with no expiration date.¹ For property tied to a binding contract signed before that date, the old Tax Cuts and Jobs Act phase-down still applies, and the rate for 2026 is 20%.²

Which Rule Applies to Your Asset

The acquisition date, not the placed-in-service date, decides which regime you fall under. Property is generally treated as acquired when a written binding contract is entered into. Sign that contract on or after January 20, 2025, and the asset qualifies for permanent 100% expensing whenever you place it in service. Sign before that date and you are locked into the phase-down, even if the equipment does not arrive until 2026.¹

The phase-down schedule for pre-January 20, 2025 acquisitions is:²

2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 and after: 0%

The gap between the two tracks is large. A $500,000 machine acquired under a December 2024 contract and placed in service in 2026 yields a $100,000 first-year bonus deduction, with the remaining $400,000 depreciated over its normal MACRS life. The same purchase under a February 2025 contract yields a $500,000 first-year deduction.

What Property Qualifies

To qualify, the asset must be depreciable under MACRS with a recovery period of 20 years or less. That covers most tangible business property: machinery, manufacturing equipment, office furniture, computers, and land improvements like parking lots and fencing. Water utility property qualifies. Off-the-shelf software depreciable over 36 months under Section 167(f)(1) qualifies, along with certain film, television, live theatrical, and sound recording productions.²

Qualified improvement property—interior improvements to nonresidential buildings, such as retail buildouts and restaurant renovations—has a 15-year recovery period and qualifies fully. Building expansions and work on elevators or escalators do not.²

Used property is eligible, provided you or a predecessor entity did not previously use it, you did not buy it from a related party, and your basis does not carry over from the seller.² Listed property—vehicles and certain electronics with common personal use—must be used more than 50% for business. Dropping to 50% or below in a later year can trigger recapture of depreciation already claimed.³

The deduction is triggered when the property is placed in service, meaning ready and available for its intended use, not necessarily the day it was purchased or first switched on.

Passenger Vehicle Caps for 2026

Even when a car qualifies for bonus depreciation, Section 280F puts a hard dollar cap on the first-year deduction. For passenger automobiles placed in service in 2026 with bonus depreciation applied, the annual limits are:⁴

Year 1: $20,300
Year 2: $19,800
Year 3: $11,900
Each succeeding year: $7,160

Without bonus depreciation, the first-year cap is $12,300. The caps in later years are the same either way.⁴

These caps apply only to vehicles classified as passenger automobiles, generally those with a gross vehicle weight rating of 6,000 pounds or less. Heavier SUVs, trucks, and vans above that threshold are not subject to the annual caps and can be fully expensed. A $75,000 truck over 6,000 pounds can be deducted in full in year one; a $40,000 sedan is capped at $20,300.

How Bonus Depreciation Compares to Section 179

Both provisions let you deduct assets upfront, but they behave differently. Section 179 has a dollar cap: for 2026, the maximum deduction is $2,560,000, with a dollar-for-dollar phase-out beginning at $4,090,000 in total qualifying purchases.⁵ Bonus depreciation has no dollar cap.

Section 179 is also capped at your taxable business income for the year; it cannot create a loss. Bonus depreciation can generate or increase a net operating loss that carries forward. That makes 168(k) the stronger tool when a business is investing heavily relative to current income.

When both apply to the same asset, Section 179 comes first, bonus depreciation applies to whatever basis remains, and regular MACRS handles anything still left.⁵ With permanent 100% bonus back on the table, Section 179 is most useful for businesses above the phase-out threshold or for selectively expensing individual assets without affecting an entire property class.

Recapture When You Sell

A large upfront deduction creates a bill later if you sell the asset for more than its depreciated value. Any gain attributable to depreciation you claimed—including the bonus portion—is recaptured. The IRS treats bonus depreciation the same as any other depreciation for this purpose.⁶

For Section 1245 property like equipment and machinery, recaptured depreciation is taxed at ordinary income rates. If you deducted the full $200,000 cost of a machine and later sold it for $80,000, the entire $80,000 gain is ordinary income. Section 1250 real property is treated more favorably: unrecaptured Section 1250 gain is taxed at a maximum rate of 25%, though any depreciation above straight-line amounts is still ordinary.

Selling shortly after taking full bonus depreciation, especially near the original purchase price, can produce a larger tax bill than expected. The math still often favors expensing, but it is worth running before you assume so.

Electing Out, and the Transition-Year 40% Election

Bonus depreciation is automatic. If property qualifies, the deduction applies unless you elect out. The election is made class-by-class and applies to every asset in that class placed in service during the year—you cannot pick individual assets. You could, for example, elect out for all 5-year property while keeping the deduction on all 7-year property in the same year.⁷

To elect out, attach a statement to a timely filed return (including extensions) with Form 4562, identifying the property class and citing Section 168(k)(7). Once made, the election is generally irrevocable without IRS consent.⁷

Reasons to turn down a 100% deduction do exist. A startup with little income may prefer to spread deductions into future profitable years rather than pile up net operating losses. A business expecting a higher tax rate later may want to save deductions for then. Some businesses elect out to keep book and tax depreciation closer, which simplifies reporting to lenders and investors.

The OBBBA also created a one-time transition election. For property placed in service during the first tax year ending after January 19, 2025, you can elect to claim only 40% instead of 100%—or 60% for longer production period property and certain aircraft.¹ This is a deliberate reduction that can be useful when you expect a materially higher bracket in a future year.

State Conformity Is Not a Given

The federal deduction flows automatically to your federal return, but state treatment varies. Only about 15 states fully conform to Section 168(k). Many require partial or full add-backs on the state return, meaning income the federal deduction sheltered can still be taxed at the state level. A few states have enacted their own permanent full-expensing rules independent of federal law. If you operate in more than one state, check each state’s current conformity before you count on the federal savings for planning.

1
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
2
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Instructions for Form 4562
4
Internal Revenue Service. Rev. Proc. 2026-15
5
Internal Revenue Service. Publication 946 – How To Depreciate Property
6
eCFR. 26 CFR 1.168(k)-1 – Additional First Year Depreciation Deduction
7
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ