History of Bonus Depreciation: From 2002 to Permanent Expensing

The history of bonus depreciation runs from a temporary 30% first-year deduction created in 2002 to a permanent 100% write-off restored by the One, Big, Beautiful Bill Act in 2025. Along the way, the rate rose to 50%, briefly hit 100% during the 2010–2011 window, settled back to 50%, jumped to a full 100% under the Tax Cuts and Jobs Act, phased down starting in 2023, and was then locked in at 100% with no expiration for property acquired after January 19, 2025. The rules that apply to any particular asset still depend on when it was acquired and placed in service, so the sequence matters.

The First Bonus Depreciation, 2002 to 2004

Bonus depreciation was created in response to the economic downturn that followed the dot-com collapse and the September 11 attacks. Capital spending had stalled, and Congress wanted a tool that would pull investment decisions forward in time. The Job Creation and Worker Assistance Act of 2002 delivered it, creating a special depreciation allowance equal to 30% of a qualifying asset’s depreciable basis for property placed in service after September 10, 2001.¹ A business buying a $100,000 machine could deduct $30,000 immediately and depreciate the remaining $70,000 on the regular schedule.

When the recovery stayed sluggish, Congress raised the rate. The Jobs and Growth Tax Relief Reconciliation Act of 2003 lifted the bonus from 30% to 50% and extended qualifying purchases through the end of 2004.² Both laws carried firm sunset dates. After 2004 the provision expired, and the tax code returned to standard depreciation.

The Recession-Era Revival, 2008 to 2015

Bonus depreciation sat dormant for several years before the 2008 financial crisis brought it back. The Economic Stimulus Act of 2008 reintroduced the 50% first-year allowance for property placed in service during that calendar year.³ The Joint Committee on Taxation estimated at the time that businesses would lower their 2008 tax bills by roughly $45 billion through this provision and a companion increase to Section 179 expensing.

What followed was a cycle of last-minute extensions. Congress would let the provision approach expiration, then renew it, sometimes retroactively. The Small Business Jobs Act of 2010 extended the 50% rate through the end of that year. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 then pushed the rate to 100% for property placed in service between September 9, 2010 and December 31, 2011, before it reverted to 50%. The American Taxpayer Relief Act of 2012 kept the 50% rate alive again.

Planning capital budgets more than a few months out was difficult under this pattern. The Protecting Americans from Tax Hikes (PATH) Act of 2015 imposed some structure, locking in 50% bonus depreciation through 2017 and setting a defined phase-down: 40% in 2018, 30% in 2019, and expiration at the end of 2019.⁴ The debate over whether bonus depreciation should be made permanent had been running for years. The PATH Act’s answer was a longer runway, not a permanent fixture.

The 100% Era Under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 changed the character of the provision. For qualifying property acquired and placed in service after September 27, 2017, businesses could deduct 100% of the cost in year one.⁵ A company buying a $2 million piece of equipment no longer needed to track a depreciation schedule at all for that asset; the entire cost hit the return in the year the equipment went into service.

The TCJA also extended bonus depreciation to used property for the first time. Before then, only brand-new assets qualified. After the TCJA, a business could claim the full deduction on a used asset provided the taxpayer had not previously used it, the seller was not a related party, and the purchase price was not determined by reference to the seller’s adjusted basis.⁵ This opened up the deduction for a wide range of second-hand equipment and business acquisitions.

The 100% rate was never intended to be permanent. The TCJA built in a phase-down starting after 2022, dropping the rate by 20 percentage points each year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after that.

The QIP Drafting Error and the CARES Act Fix

The TCJA also produced one of the more visible drafting errors in recent tax legislation. Congress intended to give qualified improvement property, meaning interior improvements to nonresidential buildings such as new lighting, drywall, or drop ceilings, a 15-year recovery period, which would have made it eligible for bonus depreciation. A drafting mistake instead left QIP with a 39-year recovery period, making it ineligible. Businesses that had planned renovations based on the expected treatment were stuck.

The CARES Act of 2020 corrected this, retroactively assigning QIP the intended 15-year recovery period for property placed in service after 2017. Because any MACRS property with a recovery period of 20 years or less qualifies for bonus depreciation, most post-2017 QIP retroactively became eligible for 100% first-year expensing. Businesses that had already filed returns without the deduction could amend them or file accounting method changes to capture the benefit.

The Phase-Down Years, 2023 to 2025

Starting in 2023, the TCJA’s scheduled reduction took effect. Property placed in service in 2023 was eligible for 80% bonus depreciation, dropping to 60% in 2024 and 40% in 2025. Each step down meant businesses absorbed more of their capital costs over time through standard depreciation rather than taking them all at once. The phase-down applied to property acquired after September 27, 2017, and before January 20, 2025.

The declining rate made the timing of asset purchases and the placed-in-service date more consequential than it had been under the flat 100% regime. A business that could accelerate a purchase into 2024 rather than 2025 picked up an extra 20 percentage points of immediate deduction.

The One, Big, Beautiful Bill Act and Permanent Full Expensing

President Trump signed the One, Big, Beautiful Bill Act (OBBBA) into law on July 4, 2025.⁴ Section 70301 restored 100% bonus depreciation and, for the first time, made it permanent. The law applies to qualifying property acquired after January 19, 2025, with no scheduled expiration.⁶

The OBBBA accomplished this by removing the phase-down percentages and the 2027 expiration date from Section 168(k) and replacing them with a flat 100% rate.⁶ A business that buys and places qualifying equipment in service during 2026 can deduct the full cost in year one, just as it could during the 2018 to 2022 window.⁷

There is an acquisition-date wrinkle worth noting. Property acquired between September 28, 2017 and January 19, 2025, but not placed in service until 2026, still falls under the old TCJA phase-down and would receive only 20% bonus depreciation. The permanent 100% rate applies only to assets acquired after January 19, 2025. For most businesses buying new equipment in 2026 this distinction is academic, but for long-lead-time assets ordered years earlier and only now delivered, the acquisition date controls which rate applies.⁶

Qualified improvement property keeps its 15-year recovery period under the OBBBA and remains eligible for bonus depreciation at the permanent 100% rate. Interior improvements to nonresidential buildings, including lighting, drywall, plumbing, and drop ceilings, can be fully deducted in the year they are placed in service, provided they were acquired after January 19, 2025. Enlargements to the building structure, elevators, escalators, and changes to the internal structural framework do not qualify.

What Property Has Qualified Throughout the History

The core eligibility rule has been consistent across every version of the provision: the property must be depreciable under MACRS with a recovery period of 20 years or less. That covers most tangible business equipment, including machinery, computers, office furniture, vehicles, and manufacturing tools. It also covers certain computer software, water utility property, and qualified film, television, and live theatrical productions.

Property with a recovery period longer than 20 years does not qualify. This excludes buildings and their structural components, which fall under the 27.5-year or 39-year MACRS schedules. Qualified improvement property is the notable exception, because Congress specifically assigned it a 15-year life to bring it within the eligible range.

Passenger vehicles face special dollar caps regardless of the bonus depreciation rate in effect. For 2026, the first-year depreciation limit on a passenger vehicle with the bonus deduction is $20,300; without the bonus deduction, that limit drops to $12,300.⁸ Vehicles weighing more than 6,000 pounds gross vehicle weight rating are generally exempt from these luxury auto caps.

State Conformity Has Never Been Automatic

Federal bonus depreciation does not automatically reduce state taxable income, and this has been true at every stage of the provision’s history. Each state decides independently whether to conform to Section 168(k). Roughly 15 states fully conform, meaning businesses receive the same immediate deduction on both federal and state returns. A handful of others allow a partial deduction. Several states, including California, New Jersey, and North Carolina, have historically decoupled entirely, requiring businesses to add back the federal deduction when computing state taxable income.

The OBBBA’s move to permanent full expensing has reopened this question for every state legislature. A business in a state that decouples will get the 100% federal deduction but may still need to depreciate the same asset over its full MACRS life for state tax purposes, creating a book-tax difference and additional compliance work. Checking your state’s current conformity status is worth doing before relying on the deduction for cash flow planning.⁹

1
Internal Revenue Service. Publication 3991 – Highlights of the Job Creation and Worker Assistance Act of 2002
2
U.S. Department of the Treasury. Effects of the Bonus Depreciation Provision in the Jobs and Growth Tax Relief Reconciliation Act of 2003
3
Internal Revenue Service. Business Provisions of the Economic Stimulus Act of 2008
4
Congress.gov. H.R.1 – 119th Congress (2025-2026)
5
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
6
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Rev. Proc. 2026-15
9
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill