What Is the Special Depreciation Allowance Deduction?

The special depreciation allowance, better known as bonus depreciation, lets you deduct the full cost of qualifying business property in the year you place it in service instead of writing it off gradually over the asset’s regular depreciation life. The One, Big, Beautiful Bill Act (OBBB) permanently set the rate at 100% for qualifying property acquired after January 19, 2025.¹ There is no sunset date on the provision. What you need to watch are the details around acquisition dates, vehicle limits, and state conformity, because each of them can quietly shrink the deduction you thought you had.

What Property Qualifies

The allowance covers four broad categories of property:

Tangible property depreciated under MACRS with a recovery period of 20 years or less. This is where most business assets live: equipment, machinery, office furniture, computers, and similar items.
Off-the-shelf computer software that is not a Section 197 intangible, plus custom software depreciated over 36 months under the straight-line method.
Qualified improvement property, meaning improvements to the interior of an existing nonresidential building made after the building was first placed in service. Enlargements, elevators, escalators, and changes to the building’s internal structural framework do not count.
Specified plants planted or grafted after January 19, 2025.

Property can be new or used. New is straightforward. Used property qualifies only if you did not use it yourself before acquiring it, you did not buy it from a related party or a member of your controlled group, and its basis does not carry over from the seller, which rules out assets received as gifts or through like-kind exchanges.²

“Placed in service” means ready and available for its intended use, not the day you first use it. Equipment installed and operational by December 31 counts for that year even if the first job doesn’t run until January.

The Acquisition Date Controls the Percentage

The 100% rate applies only to qualifying property acquired after January 19, 2025.¹ Property acquired on or before that date, even if placed in service later, still follows the Tax Cuts and Jobs Act phase-down schedule:

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

The acquisition date is what matters, not the delivery date. Sign a binding contract on January 10, 2025 for a machine that arrives in March, and you get 40%, not 100%. If you have equipment orders that straddle the cutoff, dig out the contract dates before you file.

Passenger Vehicle Caps

Passenger automobiles weighing 6,000 pounds or less run into a separate ceiling that overrides the 100% rate. For vehicles placed in service in 2026, the first-year depreciation cap is $20,300 if the vehicle qualifies for bonus depreciation, or $12,300 if it does not.³ A $55,000 sedan cannot generate more than a $20,300 first-year deduction no matter how the bonus depreciation math works out. The excess basis carries forward and comes off under the annual caps in later years.

Vehicles with a gross vehicle weight rating above 6,000 pounds are exempt from those caps. A qualifying heavy SUV or pickup can claim bonus depreciation on the full cost, subject only to a $32,000 Section 179 limit if SUV-class and you’re also using Section 179. That gap between the two categories is why heavy-duty trucks remain popular business vehicles.

Listed Property and the 50% Business-Use Rule

Listed property includes passenger automobiles, motorcycles, pickups, aircraft, and certain entertainment or recreation equipment. To claim bonus depreciation on any of it, you must use the asset more than 50% for qualified business purposes in the year you place it in service.⁴

Drop to 50% or below and the asset moves to the slower Alternative Depreciation System, with no bonus depreciation allowed. Claim bonus depreciation in year one and later see business use fall to 50% or below, and you may have to recapture part of the excess depreciation.

Property That Doesn’t Qualify

Two categories are specifically excluded:

Regulated public utility property, meaning assets used in a trade or business where rates are set by a regulatory body (gas pipelines, electric transmission lines, and the like).⁵
Floor plan financing property, which affects dealerships that finance inventory with floor plan loans.

Property depreciated under ADS is also out. Businesses required to use ADS, such as those with certain tax-exempt use property or property used predominantly outside the United States, cannot claim the allowance on those assets.

Section 179 and Bonus Depreciation Together

Section 179 expensing and bonus depreciation are separate deductions that can apply to the same asset in a set order. Section 179 comes first and reduces the depreciable basis. Bonus depreciation applies to whatever basis remains.⁶

For 2026, the Section 179 limit is $2,560,000 with a phase-out beginning at $4,090,000 in total equipment purchases. Heavy SUVs over 6,000 pounds GVWR have a separate $32,000 Section 179 cap. With 100% bonus depreciation available, the choice between the two matters less on total write-off, but one difference is real: Section 179 cannot create or increase a net operating loss, while bonus depreciation can. In a break-even or loss year, bonus depreciation gives you flexibility Section 179 doesn’t.

Electing Out

Bonus depreciation applies automatically to all qualifying property. Skipping it takes an affirmative election. Common reasons to elect out include managing taxable income in a low-profit year, preserving basis for regular depreciation in future higher-income years, or avoiding state add-back complications.

The election applies to an entire class of property, not to individual assets. Opt out for all 5-year MACRS property placed in service that year, or none of it. You cannot cherry-pick within a class.²

To make the election, attach a statement to Form 4562 with your timely filed return (including extensions) for the year the property enters service, identifying the class you’re electing out of. Revoking it generally requires IRS consent, so treat the election as permanent once made.²

For partnerships and S corporations, the entity makes the election, not the individual partners or shareholders. The resulting deduction, or absence of one, flows through on Schedule K-1. That’s worth remembering because large bonus deductions can create losses that exceed a partner’s or shareholder’s basis, making some of the deduction temporarily unusable at the individual level.

What Happens When You Sell

Taking 100% bonus depreciation drops the asset’s adjusted basis to zero or close to it. Sell later, and the gain attributable to the depreciation you took is recaptured as ordinary income under Section 1245, not taxed at capital gains rates.⁷

Say you buy a $200,000 machine, deduct the whole cost in year one, and sell it three years later for $120,000. Your basis is zero, so the entire $120,000 is ordinary income, taxed at rates up to 37% for individuals. Bonus depreciation saved tax up front and part of that benefit comes back at sale. The net effect is timing: you had use of the money for those years. For assets you plan to hold long term or run into the ground, recapture is a minor concern. For assets you flip or replace often, work it into your planning.

State Conformity Is Not Automatic

Federal and state returns can treat the same asset very differently. Many states have decoupled from federal bonus depreciation, and after the OBBB restored the 100% rate, more states enacted rules requiring taxpayers to add back the federal deduction on state returns.

The specifics vary. Some states require a full add-back and let you recover that amount over four or five later years using their own schedule. Others conform fully and require no adjustment. Some take a middle path with partial add-backs or class-based caps. If you operate in more than one state, each state’s return may handle the same asset differently, and that turns into meaningful complexity on multi-state filings.

Do not assume your state follows the federal treatment. Check current state conformity before you file, and factor any add-back into your cash flow before deciding whether to claim bonus depreciation or elect out.

Reporting on Form 4562

Bonus depreciation goes on IRS Form 4562, Depreciation and Amortization. For most qualifying property, enter the special depreciation allowance on Line 14 in Part II.⁶ For listed property, report the bonus depreciation on Line 25 in Part V instead, and document business-use percentage for each listed asset.⁸

Total depreciation from Form 4562 flows to your main business form: Schedule C for sole proprietors, Form 1065 for partnerships, Form 1120 for C corporations.⁹ You don’t need to file Form 4562 in later years for an asset that received 100% bonus depreciation unless you have other depreciable assets to report, since no basis remains to depreciate.

Records You Need to Keep

An audit of a bonus depreciation claim is really an audit of your documentation. At minimum, keep records showing each asset’s cost, how and from whom you acquired it, and the date you placed it in service. For used property, keep evidence that you had not previously used the asset and that the seller is not a related party.

Listed property demands more. You need a log, diary, or similar record tracking business versus personal use, made at or near the time of each use. For vehicles, that means a mileage log with date, destination, business purpose, and miles driven for each trip. Records must support four elements: the amount of each expenditure, the amount of each business use and total use for the year, the date, and the business purpose.⁴

Inadequate records on listed property can cost more than the bonus deduction. They can disqualify the entire depreciation deduction on the asset. Keep the documentation for at least the full recovery period plus three years, because the IRS can challenge depreciation for any open tax year in which the deduction was claimed.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
2
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
3
Internal Revenue Service. Depreciation Limitations for Passenger Automobiles Placed in Service During Calendar Year 2026 (Rev. Proc. 2026-15)
4
Internal Revenue Service. Publication 946, How To Depreciate Property
5
eCFR. 26 CFR 1.168(k)-2 – Additional First Year Depreciation Deduction
6
Internal Revenue Service. Instructions for Form 4562 (2025) – Depreciation and Amortization (Including Information on Listed Property)
7
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
8
Internal Revenue Service. Form 4562 – Depreciation and Amortization (Including Information on Listed Property)
9
Internal Revenue Service. 2025 Instructions for Form 1120 – U.S. Corporation Income Tax Return