What Is Bonus Depreciation and How Does the 100% Deduction Work?

Bonus depreciation, called the special depreciation allowance on Form 4562, is the section 168(k) deduction that front-loads the cost of qualified property into year one. Public Law 119-21 rewrote the rate in July 2025: the 100% bonus depreciation rate is now permanent for property acquired after January 19, 2025, and the schedule that would have dropped to 0% after 2026 applies only to older purchases. This guide covers the 2026 bonus depreciation rules under IRC 168(k) as amended: the rate, what qualifies, the election out, section 179, states, and a worked illustration.

The bonus depreciation rate depends on when you acquired the property

Section 70301 of P.L. 119-21 struck the phase-down in former section 168(k)(6) and the requirement that property be placed in service before January 1, 2027, and it set the allowance at 100% of adjusted basis. Its effective date rule is what matters for a buyer: the amendments apply to property acquired after January 19, 2025, and property is not treated as acquired after the date a written binding contract for it is entered into (section 70301(c)). Everything acquired earlier stays on the Tax Cuts and Jobs Act schedule, which Notice 2026-11 describes as 100% through 2022 and 20 percentage points lower each year after that.

The practical test for a 2026 purchase is the contract date. A machine ordered under a binding contract signed in December 2024 and delivered in 2026 is a pre-January 20, 2025 acquisition and gets 20%, per Rev. Proc. 2026-15. The same machine ordered in 2026 gets 100%. The deduction is taken in the year the property is placed in service, meaning ready and available for its specific use, and basis is reduced by the allowance before regular MACRS depreciation is figured on the rest.

What qualifies for bonus depreciation

Section 168(k)(2) defines qualified property by recovery period and by how you came to own it. The property must be MACRS property with a recovery period of 20 years or less, computer software depreciable under section 167(f)(1), water utility property, or a qualified film, television, live theatrical or sound recording production. Its original use must begin with you, or the purchase must meet the used property rules. Publication 946 (2025) restates the same list in chapter 3.

Qualified improvement property

Qualified improvement property is any improvement you make to an interior portion of a nonresidential building after the building was first placed in service, other than an enlargement, an elevator or escalator, or the internal structural framework (IRC 168(e)(6)). It is 15-year property under section 168(e)(3)(E)(vii), so a tenant build-out, new interior lighting or a reconfigured office floor can be written off at 100% while the building shell stays on 39-year straight line. A roof, an exterior wall or a rooftop HVAC unit is not QIP; for roofs and HVAC on a nonresidential building, section 179(e) is the route to first-year expensing.

Qualified production property

P.L. 119-21 also added section 168(n): an elective 100% allowance for the portion of a nonresidential building used as an integral part of a qualified production activity (manufacturing, production or refining), where construction begins after January 19, 2025 and before January 1, 2029 and the building is placed in service before January 1, 2031. Publication 946 points to Notice 2026-16 for the election statement. It is a separate election from bonus, and offices, sales, research and lodging space inside the building are outside it.

Electing out, class by class

Bonus depreciation is automatic. If you would rather spread deductions, perhaps because a state does not conform or a loss year cannot use them, IRC 168(k)(7) lets you elect out for any class of property for the year. The election covers all qualified property in that class placed in service that year, so you cannot keep bonus on one 5-year asset and skip it on another. The Form 4562 instructions give the mechanics: attach a statement to the timely filed return, including extensions, naming the class and stating that you are not claiming the allowance for it. A missed election can be made on an amended return within 6 months of the original due date, excluding extensions, with “Filed pursuant to section 301.9100-2” written on it. Once made, it can be revoked only with IRS consent, which means a letter ruling request.

The 40% transition election for the first year after January 19, 2025

Because the 100% rate arrived in the middle of most 2025 tax years, section 168(k)(10) offers a middle path for the first tax year ending after January 19, 2025: elect 40% instead of 100%, or 60% instead of 100% for long production period property and certain aircraft. Notice 2026-11 section 4.03 says the election follows Regulations section 1.168(k)-2(f)(3), with a statement attached to the timely filed return for the tax year that includes January 20, 2025. For a calendar-year business that year was 2025, so the election belongs on the 2025 return, not a 2026 one. The notice also confirms that taxpayers may rely on its sections 3 through 5 until proposed regulations arrive, provided they follow the notice in its entirety for all eligible property.

Bonus depreciation and section 179 together

The two deductions stack in a fixed order: section 179 first, then bonus, then regular MACRS on whatever is left (Form 4562 instructions, line 14). Section 179 is elected asset by asset, is capped at $2,560,000 for tax years beginning in 2026 (Rev. Proc. 2025-32) and cannot exceed taxable income from the active conduct of a trade or business (IRC 179(b)(3)). Bonus has no dollar cap and no income limit, so it can push a business into a loss. That loss becomes a net operating loss that carries forward under the rules in our NOL carryforward guide, subject to the 80% limit and, for individuals, the excess business loss limitation. The limits, qualifying property and recapture rules for section 179 itself are covered in the section 179 deduction guide and, for trucks and SUVs, in section 179 for vehicles.

Buildings: where bonus depreciation comes from a study

A building bought for $2 million produces no bonus depreciation on its own, because 27.5-year and 39-year property fails the 20-year test. What does qualify is the personal property and land improvements inside the purchase price: carpeting, cabinetry, dedicated electrical, parking, fencing and landscaping. A cost segregation study documents that split so the 5-, 7- and 15-year portions can take 100% in year one. Landlords depreciating a house or apartment building on the standard schedule will find the month-by-month percentages in our guide to rental property depreciation.

State conformity: check before you count on it

States write their own depreciation rules. California’s Form FTB 3885A instructions list “Additional depreciation (IRC Section 168(k))” among the federal and state differences, so a California return recomputes depreciation without bonus. Before a large purchase, confirm the treatment on your state’s own tax agency site for the tax year in question.

Two things bonus changes later

• Recapture on sale. Publication 946 says any gain on disposition is recaptured as ordinary income up to the special depreciation allowance previously allowed or allowable. Selling a fully expensed asset in year three for $100,000 means $100,000 of ordinary income, not capital gain.
• AMT. Property that took the special allowance has no alternative minimum tax depreciation adjustment (Form 4562 instructions), and Publication 946 says the same for property placed in service after 2015 when you elect out.

Sources: 26 U.S.C. 168(k), special allowance for certain property (text current through P.L. 119-111); Public Law 119-21, section 70301, full expensing for certain business property (July 4, 2025); IRS Notice 2026-11, interim guidance on the additional first year depreciation deduction under section 168(k); IRS Publication 946 (2025), How To Depreciate Property, chapter 3; IRS, 2025 Instructions for Form 4562, Part II, line 14; IRS Rev. Proc. 2026-15, section 2.02 (20% rate for 2026 placed-in-service, property acquired before January 20, 2025); IRS Rev. Proc. 2025-32, section 3.24 (2026 section 179 limits); 26 U.S.C. 179(b)(3), business income limitation; California FTB, 2025 Instructions for Form FTB 3885A (federal and state differences). Rates, dates and rules checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.