Bonus depreciation on foreign assets is generally not allowed. Under IRC Section 168, tangible property used predominantly outside the United States during the tax year must be depreciated under the Alternative Depreciation System, and ADS property is explicitly excluded from the definition of qualified property eligible for the first-year bonus write-off. A narrow set of statutory exceptions covers certain aircraft, vessels, rolling stock, satellites, submarine cables, offshore resource equipment, and property used in U.S. possessions, but outside those carve-outs the bar is strict. With the One Big Beautiful Bill restoring a permanent 100% bonus depreciation deduction for qualified property acquired after January 19, 2025, the gap between qualifying and failing the foreign-use test is larger than it has been in years.1Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
The Predominant Foreign Use Test
IRC Section 168(g)(1)(A) requires any tangible property used predominantly outside the United States during the tax year to be depreciated under ADS.2CCH AnswerConnect. 26 U.S.C. 168(g) – Alternative Depreciation System for Certain Property Because ADS property is carved out of the qualified property definition in Section 168(k)(2)(D), an asset that triggers mandatory ADS also loses bonus depreciation.3Legal Information Institute. Qualified Property From 26 USC 168(k)(2)
“Predominantly outside the United States” means the asset is physically located outside the 50 states and the District of Columbia for more than 50% of the taxable year. The test tracks where the asset physically sits and operates, not where the income it generates is reported. A U.S.-owned server rack housed in a foreign data center for seven months fails the test even if all the revenue flows back to a domestic entity. The statute treats certain seabed and subsoil areas where the U.S. holds exclusive resource rights under international law as part of the United States for this purpose.
Mobile assets are the ones that most often surprise owners. Construction equipment, drilling rigs, and fleet vehicles need real location tracking, because a piece of equipment that spends 185 days on a foreign job site and 180 days stateside has crossed the line.
Exceptions That Keep Foreign-Used Property Eligible
IRC Section 168(g)(4) lists specific categories of property that remain on regular MACRS depreciation, and therefore remain eligible for bonus depreciation, even when used predominantly abroad.4Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System The exceptions are more numerous than most taxpayers realize, but each is narrow and turns on U.S. ownership plus a functional connection to U.S. commerce.
Transportation Property
- Aircraft registered with the FAA and operated to and from the United States, or operated under a U.S. government contract.
- Vessels documented under U.S. law and operated in the foreign or domestic commerce of the United States.
- Rolling stock owned by a U.S. rail carrier or a U.S. person. Rolling stock owned by a U.S. person cannot be leased to foreign persons for more than 12 months in any 24-month period.
- Motor vehicles owned by a U.S. person and operated to and from the United States.
- Shipping containers owned by a U.S. person and used to transport property to and from the United States.
Communications and Energy Property
- Satellites and spacecraft held by a U.S. person and launched from within the United States. There is no requirement that the satellite orbit over U.S. territory.
- Submarine cables owned by a U.S. person providing international telegraph service, where the cable is part of a communications link exclusively between the United States and foreign countries.
- Satellite communications property used in international or territorial waters to transmit communications between the U.S. and foreign countries, if owned by a U.S. person.
- Property used for exploring, developing, or transporting resources from the U.S. Outer Continental Shelf. A separate exception covers similar activities on foreign continental shelves and in international waters within the northern Western Hemisphere.
Property Used in U.S. Possessions
Property used predominantly in a U.S. possession is treated as if used in the United States, provided the taxpayer is a U.S. person and the property is used in a trade or business within that possession. The possessions include Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, and the Northern Mariana Islands. Restaurant equipment deployed to a business in Guam qualifies for bonus depreciation under this rule, even though the asset never touches the mainland.
What Happens If the Asset Fails the Test
Property pushed into ADS must be depreciated using the straight-line method over the ADS recovery period, which is often longer than the corresponding MACRS period.5CCH AnswerConnect. MACRS Alternative Depreciation System (ADS) Personal property with no assigned class life runs 12 years under ADS versus 7 under MACRS. Nonresidential real property runs 40 years under ADS versus 39 under MACRS. Computers stay at 5 years under either system.6Internal Revenue Service. Publication 946 – How To Depreciate Property
The bigger cost is losing bonus depreciation entirely. A $500,000 piece of equipment with a 12-year ADS life produces a $500,000 first-year deduction under 100% bonus depreciation. Under ADS straight-line over 12 years, the first-year deduction is roughly $41,667. At a 21% corporate rate, that is the difference between a $105,000 tax reduction and about an $8,750 one in the year of purchase. The cash-flow gap is what makes the foreign-use question worth answering at the planning stage rather than at filing time.
Assets That Shift to Foreign Use After Purchase
The test is not a one-time check at purchase. If an asset that initially qualified for bonus depreciation later shifts to predominantly foreign use, the excess depreciation must be recaptured. The taxpayer includes the difference between the bonus depreciation claimed and the amount that would have been allowed under ADS as ordinary income in the year the use changes, and the asset moves to ADS going forward.7Internal Revenue Service. Instructions for Form 4562 (2025)
This trips up businesses that buy equipment domestically, claim the full first-year write-off, then redeploy the asset to a foreign operation a year or two later. If your operations span both markets, build use-tracking into your fixed-asset records before deployment rather than reconstructing location logs at tax time.
State Conformity Is a Separate Question
Even when an asset clears the federal test, state treatment may differ. Roughly two-thirds of states have historically decoupled from federal bonus depreciation in some form, requiring an addback of part or all of the federal deduction on the state return. Some states disallow it entirely; others permit a smaller percentage. State responses to the permanent 100% federal deduction restored by the One Big Beautiful Bill are still evolving, so check your state’s current conformity position before assuming the federal write-off carries through.
Where This Gets Reported
Both bonus depreciation and ADS depreciation are reported on IRS Form 4562, Depreciation and Amortization.8Internal Revenue Service. About Form 4562, Depreciation and Amortization The form requires separate identification of property subject to ADS. Taxpayers with both domestic and foreign-used assets typically complete multiple sections, one for bonus-eligible property and another for ADS property. Recapture from a change in use is also reported on Form 4562, which serves as the single reporting point for almost every depreciation event tied to the foreign-use rules.