Bonus Depreciation: Definition and How It Works

Bonus depreciation is an accelerated depreciation provision under IRC §168(k) that allows businesses to deduct a percentage — currently 100% under the One Big Beautiful Bill Act (OBBBA) — of the cost of qualifying property in the year the property is placed in service, rather than depreciating it over its MACRS recovery period. Also called "additional first-year depreciation," bonus depreciation converts capital expenditures into immediate deductions, providing a tax benefit in the year of acquisition at the expense of smaller deductions in future years. It is one of the most widely used business tax provisions for CPAs advising clients on equipment purchases, business acquisitions, and real estate improvements.

Legislative History

Bonus depreciation was introduced at 30% in 2001 and increased to 50% after the 2008 financial crisis as a stimulus tool. The Tax Cuts and Jobs Act (TCJA, 2017) increased bonus depreciation to 100% for qualified property placed in service after September 27, 2017, and expanded the definition of qualifying property to include used property (with conditions). The TCJA's 100% rate was scheduled to phase down beginning in 2023: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 under prior law.

The OBBBA (enacted July 4, 2025) permanently restored 100% bonus depreciation for qualified property placed in service on or after January 20, 2025, eliminating the scheduled phase-down. For 2024, the rate remained at 60% as the OBBBA was not retroactive for that year. For 2025 and all subsequent years, the rate is 100%.

Qualifying Property

Bonus depreciation under §168(k) applies to "qualified property" — a defined term that covers:

MACRS property with a recovery period of 20 years or less: This is the primary category and includes most tangible personal property used in business — machinery, equipment, computers, tools, vehicles (subject to luxury auto limits), furniture and fixtures, and retail improvements.

Qualified Improvement Property (QIP): Interior improvements to existing nonresidential buildings made after the building is first placed in service — assigned a 15-year MACRS recovery period under the TCJA's technical correction. QIP does not include enlargements of the building, elevators, escalators, or improvements to the building's internal structural framework.

Certain computer software defined in §197(e)(3)(B) (off-the-shelf, non-amortizable software).

Film, television, and theatrical production property placed in service during the year.

Used property (added by the TCJA): Bonus depreciation now applies to property the taxpayer did not previously use or have a depreciable interest in — meaning a business acquiring used equipment from an unrelated party qualifies, as long as the taxpayer has no prior depreciation history on that specific property.

Property that does not qualify: Residential rental property (27.5-year life), nonresidential real property building shell (39-year life), property used predominantly outside the United States, property for which the taxpayer has elected out of bonus depreciation, and property required to use the Alternative Depreciation System (ADS) — including property financed under floor plan financing and certain real property trade or business property under §163(j)(7).

How Bonus Depreciation Interacts With Section 179

Bonus depreciation and Section 179 expensing are not mutually exclusive — they are sequenced, with Section 179 applied first. Both can apply to the same property in the same year:

  1. Section 179 reduces the basis of elected property
  2. Bonus depreciation applies to any remaining basis at 100%
  3. MACRS regular depreciation covers any remaining basis (rarely needed when both elections apply)

The key difference: Section 179 cannot create a net business loss (it is limited to aggregate business income), while bonus depreciation can generate or increase a net operating loss (NOL) with no income floor. When a client needs to create a loss for NOL planning, bonus depreciation is the tool; when a client needs precise income absorption without loss creation, Section 179 is preferred.

State Non-Conformity

Most states do not conform to federal bonus depreciation. States that have decoupled — including California, New York, New Jersey, Illinois, and others — require taxpayers to add back the federal bonus depreciation deduction on the state return and depreciate the property under the state's own MACRS schedule. The state addback creates a temporary difference that reverses as the state recovers the cost over the recovery period.

For businesses with significant operations in non-conforming states, the state tax cost of bonus depreciation can materially reduce its net present value. Modeling state impact alongside federal benefit is essential before recommending aggressive first-year expensing strategies. For a full analysis of state conformity patterns and planning strategies, see How to Apply Bonus Depreciation and Section 179 for Business Clients in 2025.

Interaction With Research and Experimental Expenditures

Bonus depreciation does not apply to research or experimental (R&E) expenditures that qualify under IRC §174A — those expenditures are immediately deductible under their own provision and are not depreciated under MACRS. If a client has employees or contractors developing software or other technology in a qualifying R&E activity, evaluate §174A eligibility separately from bonus depreciation. The two provisions are mutually exclusive for the same expenditure. For §174A mechanics and the retroactive election for small businesses covering 2022–2024, see Section 174A R&D Expensing: How to Claim Retroactive Relief for 2022–2024 Returns.

Related Terms

  • Section 179 — the companion immediate-expensing provision; income-limited but applicable to used property without the "no prior basis" restriction; sequenced before bonus depreciation
  • MACRS (Modified Accelerated Cost Recovery System) — the regular depreciation system that applies when bonus depreciation is not elected or is exhausted
  • Qualified Improvement Property (QIP) — the 15-year MACRS category of interior nonresidential building improvements eligible for bonus depreciation
  • Net Operating Loss (NOL) — bonus depreciation can generate or deepen an NOL available for carryforward to future profitable years
  • Cost segregation — engineering analysis that reclassifies real property components into shorter-life categories eligible for bonus depreciation; see Cost Segregation Studies: When They're Worth It and How to Execute Them

How CPAs Use Bonus Depreciation in Practice

Bonus depreciation arises most frequently in three contexts: (1) equipment acquisition planning — timing significant equipment purchases to fall within high-income years so the deduction is absorbed at the highest marginal rate; (2) real estate improvement planning — identifying QIP from a renovation or tenant improvement project and applying bonus depreciation to the 15-year QIP component; and (3) business acquisition planning — when a client acquires a business and makes a §338(h)(10) or §754 election, the stepped-up asset basis may be eligible for bonus depreciation, potentially generating significant first-year deductions. In each context, the interaction between bonus depreciation, the QBI deduction, and state non-conformity must be modeled before a recommendation is made.