Buy $2,000,000 of equipment this year and you get a $2,000,000 deduction. There is no cap on it, no phase-out waiting for you, and no election to file. That is exactly how it works, and it is now permanent law.
About $812,000 of it actually reaches you this year.
That gap is what this post is about, and it is not a technicality. 100% bonus depreciation came back under the One Big Beautiful Bill Act and it is one of the best deductions available to a business owner. We use it constantly. A client with a short-term rental took $140,049 in a single year on a property they already owned. A contractor buying $180,000 of equipment turns a $36,000 first-year deduction into the full $180,000, without filing anything extra to get it.
But the same bill that made 100% bonus depreciation permanent also made §461(l) permanent, and lowered it. That is the excess business loss limitation, and it caps how much of a business loss you can use against income that did not come from the business. Above that cap the deduction does not disappear. It queues.
There is a second thing worth knowing before you buy anything. Bonus depreciation is automatic. You do not elect into it, you elect out of it, which means that if nobody makes a decision, the decision still gets made for you. There are real situations where electing out is the better answer, and we walk through them below.
This post covers how bonus depreciation actually works, which property gets 100% and which gets less, what a full deduction is worth, the ceiling on using it, how §179 fits alongside it, and the four places the whole thing goes wrong.
How does bonus depreciation work? Bonus depreciation lets a business deduct the full cost of qualifying assets in the year they are placed in service instead of spreading the deduction across the asset's life. Under OBBBA the rate is 100% and permanent, and unlike §179 there is no annual dollar cap on how much you can deduct.
Depreciation is the IRS’s way of acknowledging the useful life of an income-producing asset. You purchase a new vehicle today and rarely is it worth more in 5 years when you go to sell it. Most assets decline in value over time, so that should be recognized and rewarded. Depreciation allows you to deduct that portion of life that is no longer useful.
This is key, because you get a nice deduction against your income without spending any additional money. Depreciation gives you the ability to be cash flow positive but tax negative. That is, you are making money every year, but you are not paying any tax on that income.
The IRS has a set table for how long to assess the life of an asset. Most assets run between 5, 7, and 15 years, depending on the type of asset.
Let’s say you bought new office equipment for your business (computer, furniture, and some other equipment) for $15,000. The IRS tells you that has a 5-year life span, so you can take $3,000 a year in depreciation.
If you are a C-Corporation, filing at the 21% tax rate, that $3,000 deduction saves you $630 in taxes for the next 5 years.
Bonus depreciation, §168(k), allows you to accelerate that depreciation. Think of it as a reward from the IRS for making an investment and purchasing assets.
Bonus depreciation has been around in some form since 2002, usually at 50%. The Tax Cuts and Jobs Act (TCJA) is what made it worth planning around. It raised the rate to 100% and, for the first time, allowed used property to qualify instead of only new property. That same $15,000 equipment purchase could be depreciated fully in the year you bought it, saving that C-corp $3,150 in taxes.
Bonus depreciation under TCJA was never meant to be a permanent tax law, so they built in a phase-out. In 2023 it reduced to 80%, 2024 was 60%, 40% in 2025, 20% in 2026, and 0% in 2027. This made it necessary to do some planning around the phase-outs to really maximize your depreciation.
The One Big Beautiful Bill Act (OBBBA) brought back 100% bonus depreciation and made it a permanent part of tax law. This has allowed businesses and individuals to take some significant depreciation amounts in one tax year and save a lot in taxes.
One term to know before we go further. Depreciation starts when an asset is placed in service, meaning it is ready and available for its intended use, not necessarily the day you paid for it. That distinction sounds small and it is where the next section starts costing people money.
What property is eligible for bonus depreciation?
Tangible property with a MACRS recovery period of 20 years or less qualifies, including equipment, machinery, furniture, computers, and qualified improvement property. Used property qualifies if your business did not previously use it. The rate depends on when the property was acquired, not only when it was placed in service.
Bonus depreciation applies to property that has a MACRS recovery period of 20 years or less. Most assets or property used in a trade or business have 5, 7, and 15-year recovery periods, so most assets qualify. Assets such as equipment, machinery, furniture, computers, and vehicles can all qualify for bonus depreciation.
Items that do not qualify are usually bigger in nature, like buildings. Commercial buildings depreciate over 39 years and residential rental properties depreciate over 27.5 years. Neither qualifies, which is why cost segregation studies are so important to have done on buildings. A cost segregation study takes a commercial building and divides the assets between 5, 7, 15, and 39-year recovery periods. That lets the owner take bonus depreciation on the 5, 7, and 15-year assets.
There is one building-related exception worth knowing. Qualified improvement property, meaning interior improvements you make to a nonresidential building after it was already placed in service, carries a 15-year life and qualifies for bonus depreciation on its own. New flooring, interior walls, lighting, and HVAC work inside the building envelope can fall here. Enlarging the building, elevators and escalators, and work on the internal structural framework do not.
Used equipment can also qualify, but only if it was not used by the taxpayer prior to the acquisition. You can go to a used car dealer to buy a used van for your commercial business and take bonus depreciation on that vehicle. You cannot own a van personally and have your business buy it from you and get bonus depreciation.
When you purchase the assets versus when you place them in service also matters for how bonus depreciation is taken. We see this a lot with short-term rental properties.
Let’s say you owned a home that you purchased in 2024. You lived in it for a couple of years and then in 2026 you decide to move out and turn it into a short-term rental. You met material participation and did a cost segregation study. Even though you placed this asset into service in 2026, you would not receive 100% bonus depreciation under the OBBBA rules. Your asset was purchased in 2024, which means you follow the 2024 rules, and that was only 60% depreciation.
A taxpayer in the 37% tax bracket, with a $1,000,000 short-term rental property, would do a cost segregation study that qualified $250,000 of that basis as 5, 7, and 15-year property. If the rental was purchased in 2024, his tax savings would be $55,500 ($250,000 x 60% x 37%). If that same taxpayer purchased the property in 2026, his tax savings would be $92,500 ($250,000 x 100% x 37%). A $37,000 difference in tax savings based on a two-year purchase difference.
Acquisition versus in-service date is the biggest thing we see missed by taxpayers planning to do the short-term rental loophole.
How do you calculate bonus depreciation?
Multiply the asset's depreciable basis by the applicable rate, which is 100% for qualifying property acquired after January 19, 2025. A $2,000,000 equipment purchase produces a $2,000,000 deduction in year one. What that is worth to you depends on your bracket and on how much of it you can use.
A married-filing-jointly (MFJ) taxpayer had a short-term rental property purchased in 2022. They originally purchased the property for $527,725. The land was worth $110,000, which means the depreciable basis is $417,725.
Since this is a short-term rental property, the life of the property is 39 years, not 27.5 years like a long-term rental. On their tax return they were taking $10,710 in annual depreciation.
We recognized the ability to do a cost segregation study and claim material participation. The cost segregation study classified the assets as:
| Asset class | Amount |
|---|---|
| 5-year property | $90,047 |
| 15-year property | $50,002 |
| 39-year property | $277,674 |
| Total | $417,725 |
Because the property was acquired in 2022, it carries that year’s 100% rate, so the 5 and 15-year property qualified for a full first-year deduction of $140,049. At their 32% effective tax rate that is a $44,815 tax savings. They already had the property and were already doing the right things. We only had to help them record their time for material participation and do a cost segregation study.
The remainder of the property, the 39-year building asset, now receives an annual depreciation of $7,119. They dropped their annual depreciation from $10,710 to $7,119 but got a $140,049 one-year deduction out of it.
This example used a cost segregation study on a rental property to achieve bonus depreciation, but that is not a requirement. Business assets such as computers, office equipment, machinery, and vehicles all qualify for bonus depreciation without anything needing to be done.
Take a contractor who buys $180,000 of equipment this year, a heavy truck, a trailer, and job-site machinery. All of it is 5-year property. There is no study to commission and no election to file.
| Without bonus depreciation | With bonus depreciation | |
|---|---|---|
| Year one deduction | $36,000 | $180,000 |
| Additional deduction | $144,000 | |
| Tax value at 32% | $46,080 |
Without bonus depreciation, MACRS gives you 20% in the first year under the half-year convention, so $36,000. With it, the entire $180,000 lands in year one. That is $144,000 of additional deduction and roughly $46,000 of tax deferred, on a purchase the contractor was making anyway.
That last part is the whole point. The rental example required a study, a time log, and a plan. This one required buying equipment the business needed.
Can bonus depreciation offset your other income?
Only up to a limit. §461(l) caps the business loss a non-corporate taxpayer can use against non-business income at $256,000 single and $512,000 joint. Anything above that is disallowed and carried forward as a net operating loss, which is capped again at 80% of taxable income in the year you use it.
Yes, but only up to a point, and the point is lower than most people expect.
Bonus depreciation has no cap on the deduction itself. What has a cap is how much of the resulting loss you can use against income that did not come from the business.
That cap is §461(l), the excess business loss limitation. It is another code section OBBBA made permanent, and it did something people missed in the coverage: it lowered the threshold back to its 2017 level. For 2026 that is $256,000 for a single filer and $512,000 for a married filing jointly filer.
What this means in practice.
| Equipment placed in service | $2,000,000 |
| Business net income before the purchase | $300,000 |
| Business loss after bonus depreciation | $1,700,000 |
| §461(l) threshold, joint | ($512,000) |
| Excess business loss disallowed | $1,188,000 |
Add it up from the deduction’s side. The first $300,000 wipes out the business income. Another $512,000 offsets outside income. That is $812,000 of a $2,000,000 deduction actually working this year, or about 41% of it. For a single filer at the $256,000 threshold it is $556,000, or 28%.
The disallowed $1,188,000 is not gone. It becomes a net operating loss carryforward starting the following year. But under §172 the amount you can use in any year is capped at 80% of taxable income, so it comes back slowly.
If the business returns to $500,000 of taxable income, you can use $400,000 of the carryforward each year. It takes three more years to absorb the $1,188,000. The one-year deduction you bought turned into a four-year deduction.
There is an ordering point worth knowing, because it catches real estate investors in particular. §461(l) applies after the passive activity rules, not instead of them. If the loss is passive, §469 stops it before §461(l) ever gets a look. You have to clear material participation or real estate professional status first, and then you still have the excess business loss ceiling waiting behind it. Two gates, not one.
One exception matters. §461(l) applies to non-corporate taxpayers. A C-corporation is not subject to it, which is one more item on the list of things that change when the entity changes.
None of this makes bonus depreciation a bad deduction. It makes the size of the purchase a planning decision rather than an arithmetic one. A $2,000,000 purchase and a $700,000 purchase can deliver a surprisingly similar benefit in the year you make them, and the difference shows up in how many years you wait for the rest.
Do you have to elect bonus depreciation?
No. Bonus depreciation applies automatically to qualifying property. You have to elect out of it, by class, on a timely filed return. Most businesses using both provisions apply §179 first and take bonus depreciation on the remaining basis, because §179 cannot create a loss and bonus depreciation can.
Taking bonus depreciation is actually one of the easiest things to do. It is an automatic election, so if you have 5, 7, or 15-year property, it automatically takes bonus depreciation using the rules of when it was purchased. It shows up on Form 4562 with the rest of your depreciation and you do not file anything extra to get it.
If you did not want to use bonus depreciation, and there are some use cases where that is the better choice, you have to elect out. The downside to electing out is that it applies by asset class, not by individual asset. You cannot elect out of bonus on one machine and keep it on another machine in the same class. It is all of your 5-year property or none of it. The election is made on a timely filed return and it is generally irrevocable once you make it.
So when would you turn down a full deduction?
When you cannot use it. If the loss is going to run into the excess business loss limitation and sit as a carryforward for years, a deduction spread across the asset’s life may reach you sooner than one that is stuck behind §461(l).
When your bracket is going up. A deduction taken at 24% is worth less than the same deduction taken at 37%. If you are early in a business that is growing, letting the depreciation land in the years the income shows up is worth real money.
When your state does not conform. More on this below, but the federal and state answers do not always point the same direction, and the election is where you reconcile them.
There are two main types of accelerated depreciation: bonus depreciation under §168(k), and §179 depreciation.
§179 allows the taxpayer to deduct a set dollar amount. If a business purchased $1,000,000 in equipment, they could §179 that asset and take $1,000,000 in depreciation in one year. The downside is that §179 has a maximum limit. In 2026, that limit is $2,560,000. If a business purchased $3,000,000 in equipment, they could only deduct $2,560,000 in the first year and then depreciate the remaining basis over the remaining life of the asset.
Bonus depreciation has no maximum limit. If you purchased $5,000,000 in 7-year assets, you could depreciate all $5,000,000 in year one.
The big limitation on §179 is that you cannot create a loss in your business. Using the example above, if your net income in the business was only $2,000,000, you could not take the full $2,560,000 of §179. You would be capped at $2,000,000, and the unused portion carries forward to a future year with enough income to absorb it.
Bonus depreciation has no such rule. With that same $2,000,000 of net income, you could depreciate the full $3,000,000 of the asset purchase and your business would show a net loss of $1,000,000.
That difference is the one worth planning around. Because §179 cannot create a loss, §179 can never trigger the excess business loss limitation. Bonus depreciation can, and on a large purchase it usually does. If §461(l) is your constraint, §179 is the tool that does not walk you into it.
The conventional order is to apply §179 first and let bonus depreciation take the remaining basis. That is usually right, because §179 lets you choose specific assets and specific dollar amounts while bonus depreciation is automatic and applies to an entire class at once. §179 gives you a scalpel. Bonus depreciation gives you a switch.
But the order is a default, not a rule. When the excess business loss ceiling is in play, the question is not which one goes first. It is how much deduction you actually want this year.
What are the downsides of bonus depreciation?
The deduction is a timing shift, so it comes back as ordinary-rate recapture when you sell. Passenger vehicles stay capped by §280F regardless of the 100% rate. Many states do not conform, so the federal benefit overstates the combined one. And buying an asset you do not need to generate a deduction is still a bad purchase.
The passenger vehicle cap survives 100% bonus
Passenger vehicles have their own set of rules for depreciation.
A passenger vehicle under 6,000 pounds GVWR (gross vehicle weight rating) is limited to $20,400 in the first year under §280F, regardless of the 100% bonus rate. The rest of the basis does not disappear. It depreciates on the normal schedule, subject to the same annual caps in the years that follow. A vehicle over 6,000 pounds GVWR falls outside the §280F passenger auto rules entirely, and the full deduction applies.
That 6,000 pound line is the reason every video about writing off a vehicle is about heavy SUVs and trucks. GVWR is the manufacturer’s rating, not what the vehicle weighs on a scale, and it is printed on the sticker inside the driver’s door jamb.
You cannot stack bonus depreciation and §179 to get more than the §280F limitation. And §179 carries its own separate cap for SUVs in the 6,000 to 14,000 pound range, so the heavy vehicle route is not unlimited either.
Two more things decide whether any of this is available to you.
The vehicle has to be used more than 50% for business. Below that line you lose bonus depreciation and §179 entirely and fall back to straight-line depreciation.
And you have to be able to prove it. Vehicles are listed property under §274(d), which requires contemporaneous records. That means a mileage log kept during the year, not one reconstructed the following April. This is the most common way we see a large vehicle deduction come apart, and it is entirely avoidable.
Depreciation is always a double-edged sword.
You get the deduction in the year you take it, but in the year you sell you have to recapture that depreciation. There are two main types of property here: §1250 real property and §1245 personal property. §1250, like buildings, is capped at a 25% recapture rate, which allows for good tax rate arbitrage. §1245, like the 5, 7, and 15-year property you took bonus depreciation on, is not capped. It is recaptured at your ordinary income tax rate.
That means if your rate was 24% when you took the deduction, and you sell soon after in a year when your rate is 37%, you lose money on the arbitrage. You claimed it cheap and paid it back expensive.
The nice part about equipment is that it usually does what a building does not. It loses value. §1245 recapture is limited to the lesser of the depreciation you took or the gain you actually realize, so if you deducted $180,000 on equipment and later sell it for $40,000, the recapture is $40,000, not $180,000. The asset depreciating in the real world is what caps the recapture in the tax world.
That is the quiet reason bonus depreciation on equipment behaves better than bonus depreciation on a building.
Everything we’ve discussed is at the federal level. You need to check with your state and how they handle the different types of depreciation.
We were working with a business owner who was purchasing medical equipment for their practice. Their state, Illinois, doesn’t follow federal law when it comes to bonus depreciation. If we had left the automatic bonus depreciation election in place, they would have received the large federal deduction and nothing at the state level. Illinois does, however, follow federal law for §179. On their return we elected out of bonus depreciation and elected full §179 depreciation instead, which got them the full federal and state deduction.
This is exactly the situation the election-out is built for. Don’t just go with what is automatic. Check with your state to see how they handle depreciation.
Don’t let the tax tail wag the dog.
Every CPA has fielded the same question on December 31st, from a taxpayer asking whether they should buy a car to lower their tax bill. This is not the proper way to think about your asset purchases and your business income, for a few reasons.
First, you are still outlaying cash flow for tax savings. This is an “investment” tax saving strategy where you have to spend money to save. At the 37% tax bracket, you spend $25,000 on a new asset and receive $9,250 in tax savings. That’s great if you need the asset. If you don’t actually need it, you are still out $15,750 in cash.
Second, ideally your business grows year over year. If you rush out to buy assets today just for the deduction, that asset could have been purchased next year when your net income was even higher and the deduction was worth more.
Third, the real downside to this strategy is that it never ends. Are you going to purchase a new car or piece of equipment every year as your business income grows, just to keep getting the deduction? Most people can’t and shouldn’t sustain that.
Instead, the best process is to purchase assets when they are needed and take the deduction at that time.
The default is not always the right answer. Bonus depreciation applies automatically, which means that if nobody makes a decision, the decision still gets made. Whether you should take it, elect out of it, or use §179 instead comes down to your bracket, your state, and whether §461(l) is going to strand most of the deduction as a carryforward. All three are answerable before you file, and all three are far harder to fix afterward.
Schedule a 30-minute strategy call with Bullogic Wealth Management
When should a business owner talk to an advisor about bonus depreciation?
Before the purchase, and before year end. Whether a large asset purchase pays off depends on your bracket, how much other income the loss can offset, and whether you will still be in a position to use the carryforward. All three are answerable before you sign anything.
The purchase is the easy part. The planning is deciding how much of it you actually want deducted this year.
It is worth a conversation if:
Depreciation decisions are rarely just depreciation decisions. The right answer moves with your bracket, your entity, your state, and what your income is likely to look like three years from now.
Because the tax planning and the wealth planning happen in the same place here, that purchase gets evaluated against everything else going on in your year rather than on its own.
Schedule a 30-minute strategy call with Bullogic Wealth Management
100% bonus depreciation is real, it is permanent, and there is no cap on the deduction itself. That part of the headline holds up.
What has a cap is how much of it reaches you. §461(l) limits the business loss you can use against outside income to $256,000 for a single filer and $512,000 for a joint filer, and everything above that becomes a carryforward that comes back at 80% of taxable income a year. On a $2,000,000 purchase, roughly $812,000 of the deduction does its work in the year you make it. The rest takes years to arrive.
That changes the question. It is not whether you can deduct the whole thing. It is how much deduction you actually want landing in this tax year, and that answer moves with your bracket, your state, your entity, and when the property was acquired.
The part worth remembering is that bonus depreciation is automatic. Most tax strategies ask you to opt in. This one happens unless you stop it, which means the decision gets made whether or not anyone makes it deliberately.
All of it is knowable before you sign the purchase order. Much less of it is fixable after you file.
Bonus depreciation is 100% and permanent for qualifying property acquired after January 19, 2025, under OBBBA. The property needs a MACRS recovery period of 20 years or less. There is no annual dollar cap, and the deduction is automatic, so you elect out of it rather than into it.
You deduct the full cost in year one instead of spreading it across the asset's life, there is no annual dollar cap the way there is with §179, and it can create a business loss. That last one has a limit, because §461(l) caps how much of the loss offsets your other income.
§179 is capped at $2,560,000 for 2026 and cannot create a loss, so it stops at your business income. Bonus depreciation has no cap and can create one. Most businesses apply §179 first and take bonus on the remaining basis. Because §179 cannot create a loss, it never triggers §461(l).
Yes, but §280F caps passenger vehicles under 6,000 pounds GVWR at $20,400 in the first year, regardless of the 100% rate. Vehicles above 6,000 pounds GVWR escape that cap. You also need more than 50% business use and a contemporaneous mileage log to support any of it.
Not on the building itself. Residential rentals depreciate over 27.5 years and commercial over 39, both too long to qualify. A cost segregation study reclassifies components into 5, 7, and 15-year property that does. Qualified improvement property is the one building-related exception.
A cost segregation study reclassifies parts of a building into 5, 7, and 15-year property…
Rental property depreciation lets you deduct the cost of a building over 27.5 years for…
Real estate belongs in an LLC, and for most investors the right structure is a…
Self-rental is when you own a building and rent it to a business you run.…
The Augusta Rule (IRC §280A(g)) lets you rent your home for up to 14 days…
A ROBS lets you use 401(k) or IRA money to fund a business without the…
This website uses cookies.