Bonus Depreciation
Authority: IRC §168(k)
Bonus depreciation under Section 168(k) allows a business to deduct the full cost of qualifying property in the year it is placed in service instead of depreciating it over several years. It applies to property with a recovery period of 20 years or less, including machinery, equipment, vehicles (subject to luxury auto caps), computers, and the 5-, 7-, and 15-year components identified by a cost segregation study. Used property qualifies if it is new to the taxpayer. The rate had been phasing down (60% in 2024), but the 2025 tax legislation restored 100% bonus depreciation on a permanent basis for qualifying property acquired after January 19, 2025. Unlike Section 179, bonus depreciation has no dollar cap and no business income limitation, and it can create or deepen a net operating loss. Taxpayers may elect out by asset class when spreading deductions is smarter.
Example
A construction company buys $400,000 of excavation equipment in 2026. With 100% bonus depreciation it deducts the entire $400,000 that year; at a 37% combined rate that is roughly $148,000 of tax deferred into the future.
Related terms
Section 179 Expensing
Section 179 lets a business elect to deduct the cost of qualifying equipment, off-the-shelf software, and certain...
Cost Segregation
Cost segregation is an engineering-based study that breaks a purchased or constructed building into components that...
MACRS (Modified Accelerated Cost Recovery System)
MACRS is the default depreciation system for tangible property placed in service after 1986. It assigns every asset...
Net Operating Loss (NOL)
A net operating loss arises when a taxpayer's allowable deductions exceed gross income for the year, most often from...
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