Bonus Depreciation Deduction
I.R.C. § 168(k)
If you own a business and buy equipment, vehicles, or tools to keep it running, one tax rule can put real money back in your pocket the same year you spend it. It is called bonus depreciation, and recent law changes made it more valuable than it has been in years.
A Simple Way to Understand
Bonus Depreciation Deduction
- Bonus Depreciation lets business owners deduct a big part of what they spend on equipment or property right away instead of slowly over many years
- Think of it like getting most of a coupon’s value the first time you shop, instead of saving a little bit each visit
- It applies to things like machines, vehicles, computers, and certain building improvements used for business
- Taking the deduction up front lowers your taxable income that year, which can mean a much smaller tax bill
- The rules change over time, so the percentage you can deduct depends on the year you put the item to use
What Is the Bonus Depreciation Deduction?
Say you buy a $60,000 delivery truck for your business.
Normally the tax code makes you spread that cost out and deduct a small slice each year over several years. That slow process is called depreciation.
Bonus depreciation lets you skip the wait and write off a large share of the cost right away, in the same year you start using the item. It lives in the tax code under Section 168(k), and the IRS also calls it the additional first-year depreciation deduction.
The idea is simple.
When you deduct more now, your taxable income drops, and a lower taxable income means a smaller tax bill. That leaves more cash in your business right after a big purchase, which is often when you need it most.
How Does Bonus Depreciation Work?
The rule turns on one important phrase: “Placed in Service”
That means the item is set up and ready to do its job, not just bought and sitting in a box. The year you place an asset in service is the year you claim the deduction.
Here is the path from purchase to savings:
- You buy a qualifying asset
- You put it to work in your business
- Then you write off the allowed percentage of its cost on that year’s tax return.
There is no need to wait years to recover your money. For property that qualifies today, the write-off is the full 100% of the cost.
What’s a Real-Life Example of Bonus Depreciation?
- Suppose you purchase and place in service $80,000 of new machinery this year.
- With 100% bonus depreciation, you can deduct the entire $80,000 on this year’s return.
- If you are in a 24% tax bracket, that one deduction could lower your tax bill by roughly $19,200.
- The cash you save can go straight back into payroll, inventory, or your next investment.
What Property Qualifies for Bonus Depreciation?
Most of the equipment you would buy to run a company counts, as long as it has a recovery period of 20 years or less. A recovery period is simply the number of years the IRS normally assigns to an asset before it is fully depreciated. Common examples include:
- Machinery and production equipment
- Computers, servers, printers, and network gear
- Office furniture such as desks, chairs, and file cabinets
- Work vehicles, especially trucks and vans rated over 6,000 pounds, which avoid the yearly dollar caps that apply to lighter passenger vehicles
- Qualified improvement property, meaning interior upgrades to a business building
- Certain off-the-shelf computer software
One helpful point is that used items can qualify too. The property does not have to be brand new. It only needs to be new to you, which means you did not own it before and you did not buy it from a close relative or a related company.
How Much Can I Deduct in 2025 and Beyond?
For a few years this deduction was shrinking. A 2017 law had it set to fade a little more each year until it reached zero. Then the One Big Beautiful Bill Act, signed in July 2025, changed course. It brought back the full 100% deduction on a permanent basis for qualifying property that is both acquired and placed in service after January 19, 2025.
Timing still matters.
If you placed an asset in service between January 1 and January 19 of 2025, the older 40% rate generally applies. Anything qualifying after that date can claim the full amount. Because the 100% rate is now permanent, you can plan large purchases years ahead with confidence. The chart below shows how the percentage was headed down before the new law reset it.
The Rate Was Fading, Then the Law Reset It to 100%
First-year bonus depreciation percentage by the year property is placed in service.
Is Bonus Depreciation the Same as Section 179?
They are close cousins, not twins.
Both let you deduct the cost of business property up front, yet they follow different rules. Section 179 has a yearly dollar cap. For tax years beginning in 2025, you can expense up to $2.5 million, and that limit starts to shrink once your qualifying purchases pass $4 million. Section 179 also cannot push your business into a loss, because it is capped by your taxable income.
Bonus depreciation works differently. It has no dollar cap and no income limit, so it can create or deepen a business loss that you may carry into other tax years. Many owners use both tools together, applying Section 179 first and bonus depreciation second. The comparison below lays out the key differences.
How Do I Claim the Deduction on My Taxes?
You report bonus depreciation on IRS Form 4562, titled Depreciation and Amortization. You file it with your business tax return for the year the asset was placed in service. Keep clean records of what you bought, what you paid, and the exact date the item was ready for use. That date sets both the tax year and the rate you can claim, so precise records protect your deduction.
Should I Take This Deduction Every Year?
Not always, and the choice is yours. The IRS lets you elect out of bonus depreciation for a whole class of property by attaching a short statement to your return. Why would anyone skip a large deduction? Sometimes spreading deductions across future years lowers your total tax more, especially if you expect your income to rise later. State rules add another layer, because not every state follows the federal treatment the same way.
This is where a short conversation with an advisor earns its keep. The deduction is powerful, and the smartest use of it depends on your income, your plans, and your state.
Need Help With Bonus Depreciation?
The Asset Strategy team can help you use bonus depreciation to keep more cash in your business.
You can schedule a call at the footer of our website or visit www.assetstrategy.com/contact to discuss.
Sources: Internal Revenue Code Section 168(k) and Section 179; IRS Form 4562 and the 2025 Instructions for Form 4562; IRS Notice 2026-11 (interim guidance on bonus depreciation); the One Big Beautiful Bill Act (P.L. 119-21, 2025).
This material is for informational and educational purposes only and does not constitute tax, legal, or investment advice. Asset Strategy does not provide tax or legal advice. Tax laws are complex and subject to change, and any examples shown are hypothetical and for illustration only. Your results will vary based on your specific circumstances. Please consult a qualified tax professional or attorney regarding your individual situation before acting on any information presented here.
