Bonus depreciation allows businesses to immediately deduct a large percentage of the cost of qualifying assets in the year they are placed in service — rather than depreciating them over multiple years. After allowing 100% immediate deduction from 2018 through 2022, the Tax Cuts and Jobs Act established a phase-down schedule: 40% in 2025, 20% in 2026, and 0% from 2027 under current law. Acting quickly to place assets in service by December 31, 2026 can secure a 20% bonus deduction before the rate expires.
Quick answer: For assets placed in service in calendar year 2026, you can deduct 20% of the cost immediately as bonus depreciation, with the remaining 80% depreciated over the asset’s MACRS life. If you are planning a significant equipment purchase, consider whether timing it in 2025 (40%) vs. 2026 (20%) affects your tax bill.
Bonus Depreciation Phase-Down Schedule
| Tax Year | Bonus Depreciation Rate |
|---|---|
| 2018–2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 and beyond | 0% (under current law) |
Congress has the authority to extend or restore 100% bonus depreciation. Watch for year-end tax legislation that may modify these rates.
What Property Qualifies for Bonus Depreciation?
Bonus depreciation applies to qualified property, which includes:
- MACRS property with 20-year or shorter recovery period — the most common category:
- 5-year property: computers, vehicles (not luxury autos subject to caps), office equipment
- 7-year property: office furniture, most machinery, agricultural equipment
- 15-year property: certain land improvements (fences, sidewalks, roads)
- Qualified improvement property (QIP) — interior improvements to non-residential buildings already in service (15-year MACRS life)
- Computer software that is amortisable over 3 years
- Qualified film, television, and live theatrical productions (placed in service before 2026)
What Does NOT Qualify
- Buildings — 39-year (commercial) or 27.5-year (residential) life; do not qualify
- Land — never depreciable
- Intangible assets — trademarks, patents (separate amortisation rules)
- Property used 50% or less for business
- Used property (before 2017; now used property qualifies if the taxpayer has not used it before)
- Luxury vehicle caps — even qualifying vehicles are subject to annual deduction limits
Bonus Depreciation vs Section 179: Key Differences
| Feature | Bonus Depreciation | Section 179 |
|---|---|---|
| 2026 rate | 20% | Up to 100% (for qualifying assets) |
| Dollar limit | None | $1,220,000 (2024, indexed for inflation) |
| Can create a loss? | Yes (NOL carryforward) | No — capped at business taxable income |
| Used property allowed? | Yes | Yes |
| Applies to listed property? | Yes (vehicles subject to caps) | Yes |
| State conformity | Varies by state | Varies by state |
| Order of application | After Section 179 | Applied first |
Strategy: Most businesses should claim Section 179 first (to use the larger immediate deduction without loss limitations), then apply bonus depreciation to any remaining basis. If your Section 179 deduction is limited by taxable income, bonus depreciation can still provide additional deductions and create an NOL.
Worked Example: Business Equipment Purchase in 2026
Sarah owns a consulting firm and buys a high-end server system for $80,000, placed in service in January 2026. The server is 5-year MACRS property.
Step 1: Section 179 election Sarah elects Section 179 on the $80,000. Her business has $75,000 in taxable income — so her Section 179 deduction is limited to $75,000.
Step 2: Bonus depreciation on remaining basis Remaining basis after Section 179: $80,000 − $75,000 = $5,000. Bonus depreciation (20%): $5,000 × 20% = $1,000.
Step 3: Regular MACRS depreciation on remaining basis Remaining basis for regular MACRS: $5,000 − $1,000 = $4,000. Year 1 MACRS (5-year, half-year convention): $4,000 × 20% = $800.
Total Year 1 deduction: $75,000 + $1,000 + $800 = $76,800
Luxury Auto Depreciation Caps
Even if a vehicle qualifies for bonus depreciation, the IRS caps annual deductions for passenger automobiles:
| Year | 2025 Deduction Cap (Bonus Year) |
|---|---|
| Year 1 (with bonus depreciation) | $12,400 (approximate 2025 figure) |
| Year 1 (without bonus depreciation) | $12,400 |
| Year 2 | $19,800 |
| Year 3 | $11,900 |
| Each subsequent year | $5,160 |
Heavy SUVs (over 6,000 lbs GVWR) are not subject to these caps and can use Section 179 up to $30,500 and bonus depreciation without the per-year limits.
State Tax Considerations
Not all states conform to the federal bonus depreciation rules. States that do not follow federal bonus depreciation require you to add back the excess federal depreciation and use a different state depreciation schedule. Major non-conforming states include:
- California — does not conform to federal bonus depreciation
- New Jersey — partially conforms
- New York — does not conform
Always check your state’s depreciation rules. The federal benefit may be partially offset by higher state taxable income.
2026 Tax Planning: Should You Accelerate Purchases?
Given that bonus depreciation drops from 40% (2025) to 20% (2026) and then expires in 2027:
- If you were planning a purchase in early 2027: Consider whether moving it into 2026 secures the 20% bonus
- If you have a large purchase: Calculate whether the 40% rate in 2025 vs. 20% in 2026 is worth accelerating the purchase timeline
- Watch for legislation: Congress has discussed restoring 100% bonus depreciation. If restored retroactively for 2026 or 2027, waiting may pay off. Consult a tax advisor for year-end planning.
Related Small Business and Tax Resources
- Section 179 Deduction Guide — immediate expensing alternative
- QBI Deduction Guide 2026 — 20% pass-through income deduction
- Home Office Deduction Guide — deducting home workspace costs
- Self-Employment Tax Guide — SE tax, quarterly payments, deductions
- US Business Hub — all small business financial guides
With bonus depreciation at only 20% in 2026 and 0% in 2027 under current law, business owners with significant equipment needs should plan their asset acquisition timeline carefully in consultation with a tax professional.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy