Section 168(k) Bonus Depreciation Under the OBBBA: Caps and Recapture

Bonus depreciation in 2026 lets you deduct 100% of a qualifying asset’s cost in the year you place it in service, thanks to the permanent rate restored by the One Big Beautiful Bill Act (OBBBA) for property acquired after January 19, 2025.¹ Buy a $150,000 machine and put it to work in 2026, and the full $150,000 comes off your taxable income that year rather than getting spread across five, seven, or fifteen years of standard depreciation.

The old TCJA phase-down that had dropped the rate to 40% in 2025 is gone. There is currently no expiration date on the 100% allowance.²

What Property Qualifies in 2026

The main eligibility rule under Section 168(k) is that the asset be tangible property depreciated under MACRS with a recovery period of 20 years or less.³ That covers most everyday business assets: machinery, office furniture, computers, manufacturing equipment, and land improvements such as parking lots and fencing.

Several other categories are specifically eligible:²

Off-the-shelf computer software available to the general public and depreciable over 36 months.
Certain water utility property.
Film, television, and live theatrical productions with costs that would have been deductible under Section 181.
Qualified sound recording productions, a category added by the OBBBA in 2025.

Qualified Improvement Property (QIP) is in as well. QIP is any improvement made to the interior of a nonresidential building after the building was first placed in service. Its 15-year recovery period keeps it inside the 20-year window.³ Roof replacements, HVAC upgrades, fire protection, and security systems added to an existing building interior all count.

Business use has to exceed 50% in the year you place the asset in service. If personal use hits or exceeds half, the property is not eligible for the special allowance at all.³ Property used by certain regulated utilities is also excluded. And if you have made a Section 163(j) election to be treated as a real property trade or business, your nonresidential real property, residential rental property, and QIP inside that business must use the Alternative Depreciation System and lose bonus eligibility.⁴

Used Equipment

Bonus depreciation applies to both new and used assets. Used property has to clear two extra tests: you cannot have used the asset yourself before, and you cannot buy it from a related party.⁵ Related parties include family members (spouse, parents, grandparents, children, grandchildren) and commonly controlled entities, such as a corporation and its majority shareholder or two businesses owned by the same person. Used equipment from an unrelated third party is fine. Your father’s old forklift is not.

When an Asset Is “Placed in Service”

The year of the deduction turns on when the asset is placed in service, not when you pay for it. Under the regulations, property is placed in service when it is in a condition of readiness and availability for its assigned function. A machine sitting in a warehouse waiting for installation is not placed in service. A machine installed and operational is, even if you haven’t run it at full capacity yet.

This is where year-end purchases get tricky. Equipment bought in December 2026 but not installed until February 2027 generates zero 2026 deduction. Equipment delivered and installed in late December counts for 2026 even if its first production run happens in January.

How to Calculate and Claim the Deduction

Under the 100% rate the arithmetic is straightforward: cost basis times 100%. A $150,000 asset placed in service in 2026 produces a $150,000 bonus deduction. Nothing rolls forward into the standard MACRS schedule because the full cost has been recovered.

If you also take a Section 179 deduction on the same asset, apply Section 179 first, reduce the basis by that amount, then run bonus depreciation on what’s left.³ Say you expense $50,000 of that $150,000 machine under Section 179. The remaining $100,000 basis picks up 100% bonus, giving you another $100,000 deduction. First-year write-off: the full $150,000.⁶

Report the deduction on IRS Form 4562, Depreciation and Amortization, filed with your annual return. Bonus depreciation goes on Part II, Line 14.⁷ Keep records showing each asset’s cost, acquisition date, and placed-in-service date. If the IRS challenges the deduction, the burden of substantiation is on you.

How This Compares to Section 179

Both provisions accelerate cost recovery, but they behave differently. For 2026, the Section 179 deduction limit is $2,560,000, with the phase-out starting once total equipment purchases exceed $4,090,000. Section 179 cannot create or increase a net operating loss: with $200,000 of taxable income before depreciation, your Section 179 deduction stops at $200,000.

Bonus depreciation has no such income cap. It can push you into a net operating loss that carries forward to future years.² The carryforward has its own catch, though: an NOL can only offset up to 80% of taxable income in the year you eventually use it.⁸ The other 20% of that future income stays taxable no matter how large the carryforward.

Electing Out

You can decline the bonus allowance. The election applies to an entire class of property for the year, not to individual assets. Choose to skip 100% bonus on your 7-year MACRS property, and every 7-year asset placed in service that year is covered by the choice. Businesses that expect much higher income in later years sometimes elect out to preserve deductions for those years. Attach a statement to a timely filed return. The election is generally irrevocable.

Vehicles and the Section 280F Caps

Cars and light trucks qualify for bonus depreciation, but annual dollar caps under Section 280F override the percentage-based deduction. For passenger automobiles placed in service in 2026, the first-year depreciation limit is $20,300 with bonus depreciation, or $12,300 without it. Those caps apply regardless of what you paid. A $60,000 sedan does not generate a $60,000 first-year write-off.

The caps only reach vehicles rated at 6,000 pounds gross vehicle weight or less. That’s why heavy SUVs and pickups are common business buys. A vehicle rated above 6,000 pounds but at or under 14,000 pounds can be fully bonus-depreciated with no annual dollar cap, though its Section 179 portion is limited to $32,000 for 2026. Vehicles over 14,000 pounds face no cap under either provision.

Business use must exceed 50% in the year you place the vehicle in service and every year afterward. Drop below that line later and you owe back a portion of the deduction as ordinary income.

The Business-Use Recapture Rule

The 50% business-use test isn’t a one-time hurdle. If business use falls to 50% or less in any later year during the MACRS recovery period, you recapture the excess depreciation as ordinary income on that year’s return.³

The recapture amount is the difference between the bonus depreciation you actually claimed and what you would have gotten under the Alternative Depreciation System’s straight-line method. For a $50,000 asset fully expensed in year one, a drop to 40% business use in year three can trigger tens of thousands of dollars of recapture. The trap shows up most with vehicles and equipment that employees start using personally. Log the business-use percentage for every asset, every year, for the full recovery period.

Selling a Fully Expensed Asset

Claiming 100% bonus depreciation drops your basis to zero. Any sale price above zero produces gain, and Section 1245 recaptures all previously claimed depreciation as ordinary income at your regular rate, not at capital gains rates.⁹

Take that $100,000 machine you bought in 2026 and fully deducted. Sell it three years later for $35,000. Adjusted basis is $0, so the entire $35,000 is gain, and all of it is ordinary income because it stays below the $100,000 of depreciation you claimed. If it sold for $110,000, the first $100,000 would be ordinary income (recapture) and the remaining $10,000 would be a Section 1231 gain eligible for capital gains treatment.

Report the recapture on Form 4797, Sales of Business Property, using Part III for the Section 1245 calculation. The ordinary income portion flows from Line 25b of Part III to Line 13 of Part II.

Recapture is not a reason to skip the deduction. In most cases the time value of money makes the upfront write-off worthwhile. But if you buy and flip equipment inside a year or two, factor the recapture hit into your projections.

Check Your State’s Conformity

Federal bonus depreciation does not automatically flow through to your state return. Several states decouple from Section 168(k) and require you to add back some or all of the federal deduction on the state return. As of early 2026, states that have decoupled or limited the deduction include California, Delaware, Illinois, Michigan, Pennsylvania, and the District of Columbia, among others. Many of these states let you recover the same total deduction through regular MACRS depreciation over the asset’s normal life, so you get it back eventually, just not all at once.

The result is a timing mismatch: a large federal deduction in year one, a much smaller state deduction. A business claiming $500,000 of federal bonus depreciation could owe meaningful state income tax in a decoupled state that year even while showing a federal loss. If you operate in more than one state, the tracking gets heavier fast. Confirm each state’s rule before you assume the federal number carries over.

1
Internal Revenue Service. Notice 2026-11: Interim Guidance on Additional First Year Depreciation Deduction
2
Office of the Law Revision Counsel. 26 USC 168 Accelerated Cost Recovery System
3
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
4
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
5
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
6
Internal Revenue Service. Instructions for Form 4562 (2025) Depreciation and Amortization
7
Internal Revenue Service. Form 4562 – Depreciation and Amortization
8
Internal Revenue Service. Instructions for Form 172
9
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property