Bonus depreciation

The bonus depreciation provision allows businesses to immediately deduct a large percentage of the cost of eligible property in the year of purchase. Through 2025, the deduction is 100%; it then phases down to 80% (2026), 60% (2027), 40% (2028), 20% (2029), and 0% (2030 onward). This is more generous than the $1.22 million cap on Section 179 deductions, making bonus depreciation the primary tool for accelerating equipment deductions in modern tax practice.

How bonus depreciation works

Buy equipment for $1 million. Through 2025, you can immediately deduct $1 million under bonus depreciation—the entire cost in the year of purchase.

In 2026, bonus depreciation is 80%. Buy the same $1 million equipment, and you can deduct $800,000 immediately. Depreciate the remaining $200,000 over the property’s useful life.

In 2027, it is 60%; in 2028, 40%; in 2029, 20%; and from 2030 onward, there is no bonus depreciation.

Automatic, no limit, no election required

Unlike Section 179 deductions (which are capped at $1.22 million and require an election), bonus depreciation is:

• Automatic (you get it without electing, though you can opt out)
• Unlimited (no annual cap; buy $100 million in equipment, deduct 100% bonus)
• Broad (applies to most equipment, not just what you actively use)

This makes bonus depreciation far more powerful than Section 179 for businesses with large capital budgets.

Eligible property

Bonus depreciation applies to most depreciable property except real estate buildings:

• Equipment and machinery
• Vehicles (commercial)
• Computers and technology
• Furniture
• Qualified real property improvements (since 2018)

Not eligible: Buildings, land, intangible property, property held for investment only.

The recapture cost

Like Section 179, bonus depreciation deductions trigger full Section 1245 recapture on sale. If you deduct $1 million under bonus depreciation and sell for $600,000, the entire gain is recaptured and taxed at ordinary rates.

The trade-off: front-load tax savings by deducting immediately versus paying recapture tax on sale.

Opting out

In some cases, it is beneficial to opt out of bonus depreciation. For example, if a business has a loss year and cannot use the deductions, or if it wants to avoid recapture on a planned future sale, it can elect not to claim bonus depreciation.

This election is made on the tax return (usually on Form 4797).

Used vs. new property

Bonus depreciation traditionally applied only to new property. Recent tax laws (Tax Cuts and Jobs Act and subsequent guidance) expanded bonus depreciation to used property in certain contexts. Rules are complex; consult a tax professional if you are buying used equipment.

Phase-out schedule and planning

The phase-down is a cliff: when bonus depreciation drops to 0% in 2030, businesses will need to plan ahead:

• Pre-2026: Accelerate capital purchases to capture 100% bonus
• 2026-2029: Phase-out creates declining incentive; some businesses may accelerate purchases before the next phase-down
• 2030 onward: Back to normal depreciation with no bonus

This creates incentives to time large capital purchases around the phase-out dates.

Bonus depreciation vs. Section 179

For most businesses, bonus depreciation is superior because it is unlimited and automatic.

For investors in pass-through entities

Investors who own partnerships or S-corporations can receive pass-through K-1 income reflecting bonus depreciation deductions. These deductions flow through to the investor’s personal return and can offset other income.

See also