How to Apply Bonus Depreciation and Section 179 for Business Clients in 2025

The One Big Beautiful Bill Act (OBBBA) restored 100% first-year bonus depreciation for qualified property placed in service in 2025, halting the TCJA's scheduled phase-down that had reduced the rate to 60% in 2024. Separately, the Section 179 expensing election allows clients to immediately deduct up to $1,250,000 in qualifying property (IRS Rev. Proc. 2024-40), with its own income limitations and strategic applications. Both mechanisms accelerate deductions from future years into the current year — reducing taxable income now at the cost of smaller depreciation deductions later. For CPAs, the practical work is identifying qualifying property, sequencing the elections correctly, and modeling the downstream effects on the QBI deduction and state taxes before recommending an approach.

Prerequisites

• Client has placed, or intends to place, qualifying business property in service during the tax year. "Placed in service" means the property is in a condition and state of readiness for its intended use — purchased but sitting in a warehouse may not qualify.
• Property is used in a trade or business (IRC §167). Personal-use property does not qualify; mixed-use property is limited to the business-use percentage.
• For Section 179: Client's business has taxable income sufficient to absorb the deduction. The Section 179 deduction is limited to aggregate net income from all active businesses — no loss creation. Any disallowed amount carries forward indefinitely (IRC §179(b)(3)(B)).
• For high-income clients subject to the QBI deduction phase-out, have the Section 199A W-2 wage and depreciable property analysis underway. See QBI Deduction in 2025: How Section 199A Works After OBBBA for the complete methodology, including how property basis interacts with the deduction cap.

Step 1: Identify Property That Qualifies for Bonus Depreciation

Bonus depreciation under IRC §168(k), as modified by OBBBA, applies to "qualified property" — a defined term that has evolved through multiple legislative cycles. Not all business property qualifies.

Qualifying property for 100% bonus depreciation in 2025:

• MACRS property with a recovery period of 20 years or less: This includes most tangible personal property — machinery, equipment, computers, vehicles (subject to luxury auto limits), and furniture used in business
• Qualified improvement property (QIP): Interior improvements to nonresidential real property made after the building is first placed in service — designated as 15-year MACRS property under the TCJA's technical correction, making it eligible for bonus
• Certain computer software defined in §197(e)(3)(B) that is not amortizable under §197
• Film, television, and theatrical production property placed in service during the year

Note on software R&D costs: Software development costs that qualify as research or experimental expenditures under §174A follow a separate expensing rule — they are immediately deductible under §174A as written-off R&E, not depreciated under §168(k) bonus depreciation. The two regimes are mutually exclusive for the same expenditure. If your client has employees or contractors developing software (or other technology) in a potentially qualifying research activity, evaluate §174A eligibility separately — particularly for the retroactive small-business election covering 2022–2024. See the Section 174A R&D Expensing Guide for the full election mechanics and the July 6, 2026 deadline for prior-year claims.

Property that does NOT qualify:

• Residential rental property (27.5-year MACRS life) — apartment building improvements generally don't meet the QIP definition
• Nonresidential real property (39-year MACRS) — structural components, building shell, and land improvements assigned a recovery period over 20 years
• Property used primarily outside the United States (IRC §168(g))
• Property for which the taxpayer elected out of bonus depreciation (an irrevocable annual election by property class under §168(k)(7))
• Property required to use the Alternative Depreciation System (ADS) — this includes property used under floor plan financing, certain farming property, and property of an electing real property trade or business under §163(j)(7)

QIP in practice: Qualified improvement property is often the highest-leverage category because it captures tenant improvements, warehouse reconfigurations, and commercial kitchen upgrades — the kind of mid-year spending clients make during expansions. Confirm that QIP is: (1) an improvement to an interior portion of a nonresidential building, (2) made after the building was first placed in service, and (3) not an enlargement, elevator or escalator installation, or improvement to the building's internal structural framework.

A cost segregation study can reclassify 39-year building components into shorter-life personal property (5 or 7 years) or 15-year land improvements, making them eligible for bonus depreciation. For clients with significant real estate or leasehold investments, this is often the highest-value planning step available — and frequently one that generates a 10-to-1 or higher return relative to the study cost. For clients who eventually sell the property, coordinating the cost segregation benefit with a 1031 like-kind exchange can defer the resulting §1245 and §1250 recapture into the replacement property. See How to Execute a 1031 Like-Kind Exchange for Real Estate Clients for how the deferred gain and accumulated recapture potential carry over into the replacement property's carryover basis.

Step 2: Confirm the Applicable Depreciation Rate Under OBBBA

The TCJA originally provided 100% bonus depreciation for property placed in service from September 27, 2017 through December 31, 2022, with a scheduled phase-down thereafter:

• 2023: 80%
• 2024: 60%
• 2025: 40% (under the original TCJA schedule)

OBBBA restored 100% bonus depreciation for qualified property placed in service in 2025 and later years, subject to future legislative adjustment. Clients who made acquisitions early in 2025 under the assumption of the 40% rate may benefit from revised projections — the full cost is now deductible in year 1.

Election to use 50% instead of 100%: Under §168(k)(10), clients may elect to claim 50% bonus depreciation instead of the full amount. This election is relevant when the client has NOL carryforward limitations, wants to preserve some depreciable basis for future years' §199A Method 2 calculations, or operates in a state that conforms to 50% but not 100% bonus. The election is made on a class-by-class basis — a client can elect 50% for all 5-year MACRS property while claiming 100% on 7-year property.

Election out of bonus depreciation entirely: Under §168(k)(7), taxpayers may elect out of bonus depreciation for any class of property for the year. Appropriate situations include:

• The client is in a loss position where bonus would generate a non-beneficial NOL
• State tax decoupling creates a current-year state tax bill that outweighs the federal benefit
• Preserving depreciable basis in future years has a meaningful QBI deduction benefit (see Step 5)

The election out is irrevocable for the tax year and property class, but can be reversed in subsequent years.

Step 3: Apply Section 179 Where It Provides Additional Flexibility

Section 179 and bonus depreciation both achieve immediate first-year deduction of qualifying property, but they operate under different rules that make §179 preferable in specific scenarios.

2025 Section 179 parameters (IRS Rev. Proc. 2024-40):

• Dollar limitation: $1,250,000
• Phase-out threshold: $3,130,000 (the deduction is reduced dollar-for-dollar for placed-in-service amounts above this level, eliminating the deduction entirely at approximately $4,380,000 in property)
• Income limitation: The §179 deduction cannot exceed aggregate net taxable income from all active businesses; excess carries forward indefinitely (IRC §179(b)(3)(B))

Note for 2026: OBBBA raised the Section 179 limit to $2,500,000 for 2025 (effective for property placed in service after enactment, July 4, 2025) and permanently indexed it. The 2026 inflation-adjusted limit is $2,560,000, with a phase-out beginning at $4,090,000. For the full 2026 parameters, qualifying property rules, SUV caps, and state non-conformity analysis, see Section 179 Deduction 2026: Limits, Rules, and Planning Strategies.

Key advantages of Section 179 over bonus depreciation:

1. Asset-specific elections — §179 can be applied to individual assets rather than by property class, giving more precise control over the deduction amount
2. Applies in more related-party situations — bonus depreciation is disallowed for property acquired from a related party under §168(k)(2)(A)(ii); §179 generally applies
3. Limits the deduction to exactly what's needed — elect §179 for precisely the amount of income available without generating an NOL, avoiding a carryforward that may be worth less in future lower-bracket years

Key limitations of Section 179:

1. Cannot create or increase a net loss (unlike bonus depreciation, which can generate an NOL that carries forward indefinitely under the TCJA's 80% limitation rules — see Net Operating Loss (NOL) Carryforward Rules for CPAs for how the annual deduction cap affects the planning value of a bonus-depreciation-generated loss)
2. Phase-out for large asset acquirers: clients placing more than $3,130,000 in service lose the dollar cap dollar-for-dollar
3. The carryforward of disallowed §179 is not always accessible in the year it becomes available — growing businesses sometimes find that rapidly increasing income absorbs it, but declining businesses may never fully benefit from the carryforward

Passenger vehicle limitations: Both §179 and bonus depreciation are capped for "listed property" including passenger automobiles. For 2025, the first-year depreciation cap for passenger autos (vehicles under 6,000 lbs GVWR) is $12,400, plus $8,000 of additional bonus depreciation under §168(k), yielding approximately $20,400 total — well below most vehicle purchase prices. Heavy SUVs over 6,000 lbs GVWR are limited to $30,500 under §179(b)(5). Pickup trucks and cargo vans over 6,000 lbs GVWR without passenger seating configurations may qualify for full expensing under bonus depreciation; confirm GVWR with the manufacturer's specification.

Step 4: Determine the Optimal Election Sequence

When both elections are available, Section 179 is applied first, then bonus depreciation applies to any remaining adjusted basis. The ordering matters for managing the income limitation and NOL exposure.

1. Apply Section 179 first, up to the client's active business income limit — this maximizes the current-year deduction without creating an unusable §179 carryforward
2. Apply bonus depreciation to the remaining basis — since bonus has no income limitation, it can generate an NOL if the remaining basis exceeds current-year income

Example — $300,000 equipment purchase, $200,000 net business income:

Approach	§179	Bonus (100%)	Year-1 Deduction	Taxable Income Result
§179 only	$200,000 (income-limited)	$0	$200,000	$0 (plus $100,000 §179 carryforward)
Bonus only	$0	$300,000	$300,000	($100,000) NOL carryforward
§179 then bonus	$200,000	$100,000	$300,000	$0 (no NOL, no carryforward)

The combined approach eliminates taxable income without generating an NOL or a §179 carryforward — the cleanest outcome when the client wants full expensing in the current year. If an NOL is valuable — for example, a client who expects significantly higher income in future years and is in a lower bracket now — using bonus only may be preferable. If preserving the §179 carryforward for a future high-income year is the goal, use §179 alone and forgo bonus.

Year-to-year consistency: Elections are made annually. The §168(k)(7) election out of bonus is irrevocable for that year and class but does not bind future years. Section 179 elections are made on the return and are also year-specific.

Step 5: Model the QBI Deduction Interaction

This is the step most commonly omitted from accelerated depreciation planning — and it can materially affect whether full expensing is optimal for high-income clients.

The Section 199A W-2 wage limitation and depreciable property:

For clients above the taxable income phase-out thresholds ($197,300 single / $394,600 MFJ in 2025), the QBI deduction is capped at the greater of:

• 50% of W-2 wages paid by the qualified business (Method 1), OR
• 25% of W-2 wages + 2.5% of the unadjusted basis of all qualified depreciable property (Method 2)

"Unadjusted basis" means the original acquisition cost of the property — before any depreciation deductions, including before §179 or bonus depreciation. Taking 100% bonus depreciation does not reduce the property's contribution to the Method 2 QBI cap. A manufacturer who buys $2,000,000 of equipment and fully expenses it via bonus depreciation still adds $50,000 (2.5% × $2,000,000) to the §199A deduction ceiling under Method 2, as long as the property remains in service within its recovery period.

The interaction:

For capital-intensive businesses above the QBI income thresholds, large property acquisitions can significantly expand the §199A Method 2 ceiling regardless of whether bonus depreciation is taken. The decision to elect or decline bonus depreciation doesn't affect the QBI property calculation — the unadjusted basis is fixed at acquisition. However, property that has been fully depreciated and removed from service is no longer included in the unadjusted basis calculation.

For non-capital-intensive businesses — professional services, consulting, financial advisory — with no significant qualified property, the §199A cap depends almost entirely on W-2 wages. Depreciation elections are largely independent of QBI planning for these clients. The salary optimization methodology is covered in How to Calculate and Document a Reasonable S-Corp Salary.

Practical modeling step: For S-Corp clients above the phase-out threshold purchasing significant property, add the property's cost to the Method 2 calculation before finalizing depreciation elections. In many cases, full expensing via bonus is clearly optimal — the QBI cap increases the same amount either way. Where a client is near the Method 2 ceiling and considering whether to elect out of bonus, consult QBI Deduction in 2025: How Section 199A Works After OBBBA for the complete W-2 wage and property basis modeling methodology.

Step 6: Document Elections and File Correctly

Depreciation elections are made on Form 4562 (Depreciation and Amortization) attached to the taxpayer's return. No separate election statement is required for electing bonus depreciation — it is the default. The election out under §168(k)(7) requires an attachment to the return specifying the MACRS property class.

Form 4562 by section:

• Part I (Section 179): List qualifying property, acquisition cost, and the elected deduction. The income limitation applies in aggregate across all active businesses — calculate at the taxpayer level, not the entity level, when a client has multiple Schedules C or S-Corp K-1s.
• Part II (Bonus Depreciation): Bonus is reported separately from regular MACRS. The election out is attached as a statement identifying the property class. No code section election language is needed on the form itself.

Pass-through entity reporting: S-Corps and partnerships report depreciation on Form 4562 at the entity level. Section 179 deductions flow to shareholders and partners on Schedule K-1 (Box 11 for S-Corps, Box 12 for partnerships). The §179 income limitation is then applied at the shareholder or partner level on their own Form 4562. Bonus depreciation is taken at the entity level and reduces entity net income before K-1 allocation; it does not appear separately on the K-1.

State conformity — major non-conforming states:

State	Bonus Depreciation Treatment	§179 Treatment
California	No conformity — use regular MACRS	Limited to $25,000
Illinois	No conformity for bonus	Conforms to federal §179
New York	Partial conformity (year-specific)	Generally conforms
New Jersey	No conformity for bonus	Conforms to federal §179
Massachusetts	No conformity for bonus	Conforms to federal §179

For clients in non-conforming states, a separate state depreciation schedule is required. California clients who fully expense a $500,000 equipment purchase federally will owe California tax on that income in year 1 — the state depreciation deductions (using regular MACRS) recover over 5-7 years. Model the current-year state tax bill explicitly before recommending full expensing in high-decoupling states.

Amended returns: If bonus depreciation was not taken on the original return and the taxpayer wants to claim it retroactively, an amended return (Form 1040-X for individuals, Form 1120-X for C-Corps) is generally required. In some circumstances, a change in depreciation method can be made as an automatic accounting method change under Rev. Proc. 2023-11 and successor guidance, avoiding an amended return. Review the applicable Revenue Procedure before recommending the amended return path.

Record retention for depreciation elections: Maintain Form 4562 election documentation, placed-in-service date evidence, and the original acquisition cost for all depreciable assets through the full statute period following disposition — not merely through the end of the recovery period. Property fully expensed via bonus depreciation or Section 179 retains a nonzero unadjusted basis for the §199A Method 2 calculation through its recovery period, making placed-in-service and cost records material beyond the depreciation deduction year. For the complete asset record retention schedule and how this integrates with the broader client recordkeeping system, see Document Retention Requirements for Business Clients: A CPA's Complete Guide.

Common Mistakes

Treating all real property improvements as non-qualifying. Many practitioners default to 39-year depreciation for any improvement to a commercial building. Qualified improvement property — interior improvements to nonresidential property made after the building's initial placed-in-service date — is 15-year MACRS and qualifies for bonus. Misclassifying QIP as 39-year structural components costs clients several years of accelerated deductions.

Ignoring state decoupling. In California, a $400,000 equipment purchase with 100% federal bonus depreciation results in $0 federal depreciation in years 2-5 and a full California depreciation deduction spread over 5 years. The current-year California tax on the $400,000 can run $20,000-$30,000 for clients in the top bracket — a surprise if the planning conversation focused only on the federal benefit. Always run a state-specific depreciation projection for clients in California, New Jersey, or Massachusetts before recommending full expensing.

Taking maximum §179 when the income limitation will bind. A client who elects $700,000 of §179 against $250,000 of net income carries forward $450,000 — indefinitely, but not immediately. If the client's income in future years is likely to be sufficient to absorb the carryforward quickly, this may be fine. If the business is plateauing or the client is approaching retirement, the carryforward may never be fully used. Bonus depreciation, which generates an NOL rather than a §179 carryforward, may be more reliable in these circumstances.

Missing the placed-in-service requirement. Property ordered and paid for in December but delivered and ready for use in January of the next year is placed in service in the next year — not the year of purchase. Clients who rush to make year-end equipment purchases should confirm delivery and readiness for intended use before December 31. A signed purchase order, deposit, or even full payment does not establish placed-in-service date. The IRS focuses on when the asset is in a condition or state of readiness for use. For how year-end equipment timing integrates with salary, QBI, and retirement planning, see Year-End Tax Planning Checklist for CPAs.

Omitting the QBI property basis from the §199A Model 2 calculation. For clients above the phase-out threshold with capital-intensive operations, newly acquired property's unadjusted basis contributes to the 2.5% Method 2 cap regardless of how it is depreciated. Failing to include it understates the available QBI deduction — sometimes by a significant amount for large equipment acquirers. Even fully expensed property remains in the unadjusted basis calculation through its recovery period.

FAQs

Does 100% bonus depreciation apply to used equipment?

Yes, for property placed in service after September 27, 2017. The TCJA removed the prior-law "original use" requirement, extending bonus depreciation to both new and used property — provided the taxpayer (or a predecessor) has not previously used the property. A client purchasing used equipment from an unrelated third party qualifies. Used property acquired from a related party (as defined under §267 or §707) generally does not qualify for bonus under §168(k)(2)(A)(ii), though Section 179 typically applies.

Can an S-Corp shareholder take bonus depreciation on property held personally and leased to the corporation?

Generally no. Property held by the individual shareholder and leased to the S-Corp is depreciated at the individual level on Schedule E under the passive activity rules governing self-rentals, not as S-Corp business property. The better approach for significant asset purchases is to have the S-Corp acquire the property directly — this allows the entity to claim bonus depreciation at the entity level, with the benefit flowing through the K-1. For entity-level asset planning considerations, see S-Corp vs LLC: Which Tax Structure Saves More in 2025?.

What if the client filed without claiming bonus and now wants to retroactively elect it?

If the return was filed without electing bonus depreciation (using regular MACRS instead), the taxpayer generally must file an amended return to claim it. Alternatively, certain depreciation method changes can be made as automatic accounting method changes under Rev. Proc. 2023-11 and successor guidance, which may avoid the amended return process in specific circumstances. Review the applicable Revenue Procedure before determining the corrective path.

How does bonus depreciation affect net operating loss carryforwards?

Bonus depreciation can generate an NOL that carries forward indefinitely under IRC §172(b)(1)(A). Under current law, NOL carryforwards are limited to 80% of taxable income in the year applied. For non-corporate taxpayers (individuals, S-Corp shareholders, partners), there is an additional layer to consider: if the net business loss — after aggregating all pass-through and Schedule C activity — exceeds $313,000 single / $626,000 MFJ (2025, indexed), the excess business loss limitation under §461(l) disallows the excess for the current year and converts it to an NOL carryforward. The 80% limitation then applies when that carryforward is used. For high-income clients taking large first-year bonus deductions, this stacked limitation affects both the current-year benefit and the NOL's future utilization rate. For high-bracket clients who expect similar or higher income in future years, generating an NOL via bonus depreciation is often highly valuable — effectively creating a deferred-but-accessible deduction. For clients expecting lower income in future years (approaching retirement, planned deceleration), the 80% limitation means the NOL may take several years to fully absorb, reducing its present value.

Do Section 179 deductions pass through to S-Corp shareholders?

Yes. The S-Corp computes its §179 deduction on Form 4562 and reports the deductible amount on Schedule K, which flows to each shareholder's Schedule K-1 (Box 11). Each shareholder then applies the §179 income limitation on their own Form 4562 — the limitation is computed at the individual taxpayer level, not the entity level. A shareholder with insufficient active business income to absorb the K-1 §179 amount carries the excess forward until they have income to offset. The S-Corp itself does not carry forward disallowed §179 amounts.

Arvori helps CPAs track depreciation elections, model bonus depreciation and Section 179 interactions across client portfolios, and flag year-end property planning opportunities. Learn more at arvori.app.