How 100% Bonus Depreciation Works Under the New Tax Law

Businesses can once again deduct the full cost of qualifying equipment, machinery, and other short-lived assets in the year they’re placed in service. The One, Big, Beautiful Bill (OBBB), signed in 2025, restored 100% bonus depreciation on a permanent basis for property acquired after January 19, 2025.¹ Property acquired before that date is stuck with the old phase-down schedule, so two assets placed in service in the same month can produce very different deductions depending on when the purchase contract was signed.

What the 100% Deduction Covers

Bonus depreciation applies to property that qualifies under Section 168(k). The core requirement is a MACRS recovery period of 20 years or less.² That threshold takes in most of what businesses actually buy:

3-year property such as certain manufacturing tools and tractor units
5-year property including computers, office equipment, automobiles, and most manufacturing equipment
7-year property such as office furniture, fixtures, and general-purpose machinery
10-year property including water transportation equipment and certain food-processing assets
15-year property such as fences, sidewalks, parking lots, and other land improvements
20-year property including farm buildings and certain utility infrastructure

Residential rental buildings (27.5-year recovery) and nonresidential real property (39-year recovery) sit above the ceiling and don’t qualify. Property you’re required to depreciate under the Alternative Depreciation System is also excluded.³

Used Property Counts

Since the Tax Cuts and Jobs Act, used equipment qualifies for the deduction alongside new. The catch is that the asset must be new to you. You can’t claim bonus depreciation if you or a related party previously used the property, if you bought it from a related party, or if your basis is carried over from the seller rather than measured by what you paid.⁴

Qualified Improvement Property

Interior improvements to nonresidential buildings qualify as qualified improvement property (QIP) and are treated as 15-year property, provided the work doesn’t enlarge the building, install an elevator or escalator, or change the internal structural framework.³ Elect out of bonus depreciation and QIP recovers over 15 years straight-line under GDS, or 20 years under ADS.

When Property Is Placed in Service

An asset is placed in service when it’s ready and available for its intended use, whether or not you actually start using it that day.⁵ Equipment delivered in December but not installed until January is a January placed-in-service date. Equipment installed and operational in December counts as placed in service that year even if the first job doesn’t run until February. That date controls which year’s rules apply.

The Acquisition-Date Cutoff

For OBBB purposes, acquisition date is when you sign a binding written contract to buy the property. If you build or manufacture the asset yourself, the acquisition date is when construction begins.⁶ As long as acquisition happens after January 19, 2025, the full 100% rate applies whenever the asset is later placed in service.

Calendar-year taxpayers have a one-time election for property placed in service during 2025: instead of the full 100%, you can elect 40%, or 60% for certain longer-production-period property and aircraft.⁶ That option exists because an enormous first-year deduction sometimes interacts badly with other limitations.

Property Acquired Before January 20, 2025

The OBBB did not reach back to fix rates for property acquired under the old rules. If your business signed the contract before January 20, 2025, the TCJA phase-down still controls based on the placed-in-service year:

After September 27, 2017 through 2022: 100%
2023: 80%
2024: 60%
January 1 through January 19, 2025: 40%
2026: 20%
2027: 0%

Those legacy rates continue to apply even after the OBBB restored 100% for newer purchases.² So if you signed a purchase contract in December 2024 and the equipment isn’t placed in service until 2026, you get a 20% bonus deduction on that asset. Cancel and re-contract for the same equipment after January 19, 2025 and the full 100% is available. Whatever percentage applies, the remaining basis is recovered through standard MACRS over the asset’s class life.

Certain property with a production period longer than one year and a cost above $1 million, along with certain aircraft, gets an extra year under both the legacy schedule and the OBBB transition election.⁷

Business Vehicles

Cars are eligible but face annual dollar caps. For passenger automobiles placed in service in 2026, the first-year depreciation limit is $20,300 with bonus depreciation and $12,300 without.⁸ The $8,000 gap is the bonus component. Later years cap out at $19,800 (year two), $11,900 (year three), and $7,160 per year after that.

Vehicles with a manufacturer’s gross vehicle weight rating above 6,000 pounds sit outside the luxury auto caps. Many full-size SUVs, pickup trucks, and vans clear the threshold. A qualifying heavy vehicle acquired after January 19, 2025 and used entirely for business can produce a full 100% deduction with no dollar ceiling. A $70,000 heavy SUV yields a $70,000 first-year deduction; a $70,000 sedan is capped at $20,300.

Bonus Depreciation and Section 179

Section 179 expensing and bonus depreciation both accelerate deductions, but they operate differently. Section 179 for 2026 allows up to $2,560,000 of qualifying property to be expensed, with the deduction phasing out once total asset purchases exceed $4,090,000. Section 179 cannot create or increase a net operating loss; the deduction is limited to taxable income from your active businesses. Bonus depreciation has no dollar cap and no income limitation.

When both apply to the same asset, Section 179 comes first and reduces the basis, then bonus depreciation runs on whatever remains.³ With 100% bonus depreciation back, many businesses find Section 179 unnecessary. It still helps when you want to accelerate deductions on specific items while electing out of bonus depreciation for the broader class, or when total purchases exceed the amounts where a legacy bonus rate would otherwise apply. Both deductions are reported on Form 4562.⁹

Electing Out

Bonus depreciation applies automatically to every qualifying asset unless you opt out. The election is made class by class. You can elect out of all 5-year property while still claiming the deduction on 7-year property. To opt out, attach a statement to a timely filed federal return identifying the class you’re electing out of.⁴

Reasons businesses turn down the deduction:

A large first-year deduction can create or inflate a net operating loss. If future years look higher-income, spreading deductions may be worth more than the immediate write-off.
The Section 199A qualified business income deduction is limited by taxable income. Aggressive bonus depreciation can drop income far enough to erode the QBI benefit.
Multi-state operations get simpler when the federal and state depreciation schedules match.

The election is generally irrevocable for that class and year without IRS consent. You can revoke or make a late opt-out election by filing an amended return within six months of the original due date, excluding extensions. A late election must reference Treasury Regulation Section 301.9100-2.

Loss and Interest Interactions

Two other rules shape the practical value of the deduction.

Section 163(j) caps deductible business interest at 30% of adjusted taxable income. For tax years beginning after December 31, 2024, the OBBB restored the add-back of depreciation, amortization, and depletion when computing ATI.¹⁰ Claiming large bonus depreciation deductions no longer shrinks the amount of deductible interest. From 2022 through 2024, depreciation wasn’t added back, which squeezed capital-intensive businesses with debt.

Non-corporate taxpayers also face the Section 461(l) excess business loss limitation. The base threshold is $250,000 ($500,000 joint), adjusted annually for inflation. Bonus depreciation deductions that push net business losses above that ceiling are suspended and carry forward as part of your net operating loss. Even with 100% bonus depreciation restored, individual owners and partners may not use the whole deduction in the placed-in-service year.

State Conformity

Federal and state treatment of bonus depreciation often diverge, and the mismatch creates real work. Many states don’t follow the federal rules, a situation called decoupling. Where a state decouples, you keep two depreciation schedules for the same asset: federal at the bonus rate, state under standard MACRS.

Full conformity states allow the same bonus deduction on the state return.
Fully decoupled states ignore the federal bonus deduction and require standard MACRS, producing a basis difference tracked for years.
Partial conformity states may allow a portion of the federal deduction, conform to an older bonus rate, or cap the annual amount.

The basis difference isn’t merely paperwork. In the placed-in-service year, state taxable income is higher because the state didn’t allow the big write-off. In later years the pattern flips as state depreciation continues while federal is already exhausted. Total depreciation matches over the full recovery period; the difference is timing. Across hundreds of assets and multiple states, that timing turns into a compliance project.

Some states also treat entity types differently, conforming for corporations but decoupling for partnerships and S corporations. Because state rules shift after major federal legislation like the OBBB, verify each state’s current position before filing.

Recapture When You Sell

The other side of the fast deduction shows up at sale. Bonus depreciation drops the asset’s basis immediately, often to zero. When you sell, the gap between sale price and adjusted basis is gain, and most of that gain is taxed as ordinary income rather than capital gain.

Under Section 1245, gain on the sale of depreciable personal property is ordinary income to the extent of all depreciation previously deducted.¹¹ Because 100% bonus depreciation wipes basis to zero, essentially the entire sale price up to original cost gets recaptured as ordinary income at your marginal rate. Only the portion above original cost qualifies for long-term capital gains rates, and only if you held the asset more than a year.

Take a machine bought for $100,000 and fully deducted, leaving a $0 basis. Sell it for $60,000, and the whole $60,000 is ordinary income. Sell it for $110,000, and $100,000 is ordinary recapture with $10,000 taxed as capital gain.

Selling on an installment plan doesn’t spread the recapture. The full recapture amount is ordinary income in the year of sale, even without payments received that year.¹² Only gain above the recapture amount can be reported under the installment method. Recapture is computed on Part III of Form 4797 and reported as ordinary income on Part II.¹³

Like-kind exchanges under Section 1031 can defer recapture, but the TCJA restricted these exchanges to real property. Because most bonus-depreciated assets are tangible personal property, swapping equipment for equipment is a fully taxable event on both sides, and the recapture rules apply in full to the property given up.

1
Internal Revenue Service. One, Big, Beautiful Bill Provisions
2
Office of the Law Revision Counsel. 26 USC 168 Accelerated Cost Recovery System – Section: (k) Special Allowance for Certain Property
3
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
4
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
5
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
6
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
7
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
8
Internal Revenue Service. Rev. Proc. 2026-15
9
Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
10
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
11
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
12
Internal Revenue Service. Publication 537 (2025), Installment Sales
13
Internal Revenue Service. About Form 4797, Sales of Business Property