Bonus Depreciation: How It Works & What's Changing

Bonus depreciation lets a business deduct the full cost of qualifying equipment and assets in the year you put them to use, instead of spreading the deduction across many years. It is one of the most powerful ways to lower a profitable year's tax bill — and the rules changed significantly in 2025.

What Changed: 100% Is Back — Permanently

Under the 2017 Tax Cuts and Jobs Act, bonus depreciation was phasing out: 80% in 2023, 60% in 2024, and just 40% in 2025, heading to 0% by 2027. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, eliminated that phase-down and permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. There is no longer a scheduled expiration.

Timing note: property under a binding written contract dated before January 20, 2025 generally stays under the old phase-down percentages — the acquisition and placed-in-service dates both matter.

What Qualifies

Tangible business property with a recovery period of 20 years or less — machinery, equipment, computers, furniture, and many vehicles
Off-the-shelf software
Qualified improvement property (certain interior improvements to non-residential buildings)
Used property also qualifies, as long as it is new to your business

Ordinary buildings (39-year property) generally do not qualify, although the OBBBA added a separate temporary 100% allowance for certain qualified production property used in U.S. manufacturing.

Bonus Depreciation vs Section 179

Both let you expense assets up front, but they differ:

Section 179 has an annual dollar cap, phases out for high-spending businesses, and cannot create a loss.
Bonus depreciation has no dollar cap, applies automatically to qualifying property unless you elect out, and can create or increase a net operating loss.

Many businesses use Section 179 first on selected assets, then bonus depreciation on the rest. You can also elect a reduced 40%/60% rate, or elect out by class of property, if spreading deductions serves your plan better.

A Word of Caution

A 100% first-year deduction is not always the best move — it can waste deductions in a low-income year, and many states do not conform to federal bonus depreciation, creating a difference between your federal and state returns. Model it against your multi-year picture before claiming it.

Planning a major equipment or vehicle purchase? SK Financial will model bonus depreciation vs Section 179 for your situation and capture the deduction correctly. Rules current as of 2026 — confirm your year's specifics with us.