Bonus Depreciation

What bonus depreciation does

Normal depreciation spreads the cost of an asset over its recovery period. A five-year asset gives you a piece of the deduction each year for six tax years. Bonus depreciation under Section 168(k) lets you take a set percentage of the cost in the first year instead.

For 2026 that percentage is 100 percent on qualified property acquired after January 19, 2025. You buy a $60,000 machine, place it in service, and deduct $60,000 the same year.

This is a timing move, not free money. You never deduct more than you paid. You just get the deduction sooner, which is worth the tax saved multiplied by the time you hold the money.

The 2026 rate and the dates that decide it

The One Big Beautiful Bill Act amended Section 168(k) in 2025. It set the additional first-year depreciation at 100 percent of basis for qualified property acquired after January 19, 2025, with no expiry date. The IRS issued interim guidance in Notice 2026-11 on January 14, 2026, which taxpayers may rely on until proposed regulations arrive.

"Acquired" follows the written binding contract rule. Property is acquired when you sign a binding contract to buy it, not when you close or take delivery. For construction, acquisition is when physical work of a significant nature starts. A building under contract in December 2024 and finished in 2026 is on the old schedule.

The schedule this replaced

The Tax Cuts and Jobs Act allowed 100 percent bonus through 2022 and then stepped it down.

Those percentages still apply to property acquired on or before January 19, 2025, and they are what you use on an amended or late return for an earlier year.

The one-time 40 percent election

Notice 2026-11 describes an election to claim 40 percent instead of 100 percent, or 60 percent for certain long production period property and aircraft. It was available only for property placed in service in the first taxable year ending after January 19, 2025. For a calendar-year filer that was the 2025 return. The window is closed for 2026.

What qualifies

Qualified property under Section 168(k) generally means tangible property with a MACRS recovery period of 20 years or less, off-the-shelf computer software, qualified improvement property, and certain water utility property and film or theatrical productions.

In practice that covers:

• Machinery, tools, and production equipment.
• Computers, servers, and off-the-shelf software.
• Office furniture and fixtures.
• Business vehicles, subject to the Section 280F limits on passenger cars.
• Appliances, carpet, cabinets, and furniture in a rental, which are five or seven year property.
• Land improvements such as driveways, fencing, and landscaping, which are fifteen year property.
• Qualified improvement property, meaning interior improvements to a non-residential building made after it was first placed in service.

Used property qualifies as long as it is new to you and you did not acquire it from a related party or in a carryover basis transaction.

What does not qualify

• The building shell itself. Residential rental property runs 27.5 years and non-residential 39 years, both over the 20-year limit.
• Land. Land is never depreciated.
• The structural envelope, such as the roof, foundation, external walls, and the framing. Section 179 can reach a non-residential roof, but bonus depreciation cannot.
• Property acquired from a related party.
• Property used predominantly outside the United States, and property in an electing real property or farming business that must use ADS.

How it works with cost segregation

Bonus depreciation and cost segregation are not competing strategies. One creates the eligible property and the other writes it off.

When you buy a building, the default is to put nearly all of the depreciable basis into a 27.5 or 39 year class. None of it qualifies for bonus. A cost segregation study is an engineering review that reclassifies the parts that really belong in shorter classes: the appliances, the cabinetry, the specialty electrical, the flooring, the parking area, the fencing.

Those reclassified parts have recovery periods of 20 years or less, so the 100 percent bonus rate applies to all of them in year one.

A worked example

These are assumptions. Change any of them and the answer changes.

The study costs $8,000 to $15,000 on a building this size. The first-year difference here is about $81,000 of tax. That is the whole case for pairing the two.

Be clear about what this is. The extra $231,273 of deduction is pulled forward from later years, and the depreciation reduces your basis, so it comes back as gain when you sell. See depreciation recapture before you decide.

How it works with short-term rentals

Bonus depreciation on a rental is easy. Using the deduction is the hard part.

A rental loss is passive under Section 469, and a passive loss cannot reduce W-2 income. A $240,000 bonus deduction on a rental that is passive to you gets suspended and carried forward until you have passive income or you sell.

Two ways to make it usable. The short-term rental exception, where the average guest stay is seven days or less and you materially participate, or real estate professional status. The comparison of the two shows which is realistic for someone with a job.

Order matters. Decide whether you can clear a participation test before you pay for a study. A large deduction you cannot use this year is worth much less than the invoice for the study that produced it.

Bonus depreciation against Section 179

Both give a first-year write-off. They are not the same tool.

The 2026 Section 179 figures come from Revenue Procedure 2025-32, which indexed the $2,500,000 and $4,000,000 amounts set by the 2025 law. See the Section 179 guide for the detail.

The usual order is Section 179 first on the items only it can reach, then bonus depreciation on the rest, then regular MACRS on what is left. Section 179 reduces basis before bonus is calculated, so the two do not stack on the same dollar.

Business vehicles

Bonus depreciation reaches business vehicles, but Section 280F caps first-year depreciation on passenger cars, and the cap includes the bonus amount. Heavier vehicles above 6,000 pounds gross vehicle weight are outside the passenger car caps, though Section 179 on an SUV has its own separate limit.

You also only get the business-use share. A $70,000 vehicle used 80 percent for business gives a $56,000 basis for depreciation, and that split has to be supported by a mileage log kept during the year. See the business vehicle deduction guide.

Common mistakes

• Using the closing date instead of the contract date. The January 19, 2025 cutoff turns on when the binding contract was signed.
• Claiming the deduction in the wrong year. The rule is placed in service, meaning ready and available for its intended use, not paid for or delivered.
• Calling structural work qualified improvement property. QIP is interior work on a non-residential building after it was first placed in service. Roofs, framing, and external walls are out.
• Buying from a related party. Property acquired from a related party does not qualify, however new it is to you.
• Taking a loss you cannot use. Passive loss limits, the excess business loss cap in Section 461(l), and a low marginal rate can all leave the deduction stranded.
• Forgetting the recapture. Short-life components are mostly Section 1245 property and come back as ordinary income when you sell.
• Thin records on a study. A study written by an engineering firm with a detailed asset list holds up. A spreadsheet split of the purchase price does not.

How to claim it

• Confirm the acquisition date and the placed in service date.
• Get the asset list, with a recovery period for every line. On a building, that means a cost segregation report.
• Check that nothing was bought from a related party and nothing is subject to ADS.
• Apply Section 179 where it reaches something bonus cannot, then bonus depreciation on the remaining basis.
• Report it on Form 4562, Part II for the special depreciation allowance.
• Decide whether to elect out for any class under Section 168(k)(7). The election is per class and it is hard to reverse.
• Keep the study, the invoices, and the in-service evidence with the return.

If you want more background on where this sits among the other moves, start with tax strategies 101, or read the guides on rental property depreciation, the S-corp election, the pass-through entity tax, and LLC against S-corp.