Bonus depreciation

What is bonus depreciation?

Bonus depreciation — also known as the additional first-year depreciation deduction or the 168(k) allowance — allows businesses to write off a large percentage of an eligible asset's cost in the first year it is placed in service. The remaining cost, if any, can be deducted over multiple years using regular depreciation methods.

The One Big Beautiful Bill Act (OBBBA) permanently reinstated 100% bonus depreciation, as initially created by the Tax Cuts and Jobs Act (TCJA), for qualified property acquired and placed in service after January 19, 2025. A transitional election permits taxpayers to apply 40% or 60% bonus depreciation on certain property placed in service after January 19, 2025.

For qualified property placed in service between January 1, 2025, and January 19, 2025, the bonus percentage is 40%.

How does bonus depreciation work?

Bonus depreciation works by first purchasing qualified business property and then putting that asset into service before year-end. It is then reported to the IRS on Form 4562.

For example, if a business purchased new computer software in December 2025 but didn’t put it into service until January 2026, it would be required to wait until it filed its 2026 tax return to claim bonus depreciation on the software.

Learn more by checking out the accountants’ guide to calculating depreciation for different property types.

What are the tax benefits of bonus depreciation?

Bonus depreciation is an important tax-saving tool for businesses, allowing them to take an immediate deduction on the cost of eligible business property in the first year. This lowers a company’s tax liability because it reduces its taxable income.

What qualifies for bonus depreciation?

To qualify for the bonus depreciation deduction, certain criteria must be met. Qualifying assets can include:

• Any Modified Accelerated Cost Recovery System (MACRS) property with a recovery period of 20 years or less. This includes such property as computer equipment and office furniture.
• A depreciable computer software
• Water utility property
• Qualified improvement property, like any improvement to the interior portion of a nonresidential building
• Costs of certain film, television, and live theatrical production
• Qualified sound recording productions commencing in tax years ending after July 4, 2025
• Qualified improvement property for vacation property used as a short-term rental, such as an Airbnb
• Any residential rental estate if the taxpayer conducts a cost-segregation study and identifies qualified property
• Any vehicles that have a useful life of 20 years or less
• Used equipment if it was not used by the taxpayer at any time prior to the acquisition

Additional information about eligibility requirements can be found at Treas. Reg. § 1.168(k)-2(b) and on the Internal Revenue Service’s (IRS’s) additional first-year depreciation deduction FAQ page.

What is the difference between bonus depreciation and section 179?

While bonus depreciation and Section 179 are both immediate expense deductions, bonus depreciation allows taxpayers to deduct a percentage of an asset’s cost upfront. In contrast, Section 179 allows taxpayers to deduct a set dollar amount. There are additional notable differences.

• Section 179 has a limit on the annual deduction. For 2025, the maximum Section 179 expense deduction is $2,500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,000,000. Bonus depreciation has no annual limit on the deduction.
• Section 179 deductions are also limited to annual taxable business income, meaning that a business cannot deduct more money than it made. Bonus depreciation does not have this limit and can be used to create a net loss.

Businesses may be able to combine bonus depreciation and Section 179 deductions to claim both deductions in the same tax year.

How do you calculate bonus depreciation?

To calculate bonus depreciation, you need to multiply the bonus depreciation rate — currently 100% — by the cost of the business asset. This amount is then deducted from the business’s income.

How do you report bonus depreciation?

Bonus depreciation is reported on IRS Form 4562, “Depreciation and Amortization,” by the due date — including extensions — of the federal tax return for the tax year in which the qualified property is placed in service by the taxpayer. Note that a taxpayer can elect out of bonus depreciation for any class of qualified property that is placed in service during the tax year.

Can bonus depreciation create a loss?

Yes, bonus depreciation can be used to create a net loss. If the bonus depreciation deduction creates a net operating loss for the year, the company can carry forward the net operating loss to offset future income, subject to limitation.

Is bonus depreciation subject to recapture?

Yes, when the property for which bonus depreciation was claimed is sold, that depreciation is recaptured and taxed as ordinary income.

When does bonus depreciation expire?

Thanks to the One Big Beautiful Bill Act, 100% bonus depreciation is now permanent.

Which states allow bonus depreciation?

The state tax treatment of bonus depreciation provisions depends on the state’s conformity to the Internal Revenue Code (IRC) and each state’s decoupling provisions.

States follow different approaches in adopting conformity to the IRC, resulting in inconsistent state tax treatment of federal expensing and bonus depreciation rules. Some states conform to the current IRC, for example, Colorado, Kansas, and Louisiana; other states have decoupled from the IRC provisions, like Illinois, New Jersey, New York, and Pennsylvania. Other states have enacted legislation that allows partial conformity or conformity in some but not all tax years covered by the federal rule, such as Arkansas, Connecticut, and Kentucky.

For more information on a particular state’s conformity to the federal bonus depreciation provision, see the State Charts tool on Checkpoint.

To learn about more changes from the One Big Beautiful Bill Act, visit our OBBBA resource center for an executive summary of the Act, tips on how to advise your clients about the legislative changes, and more.