Bonus Depreciation in 2026: What Business Owners Need to Know

For years, bonus depreciation has been one of the most valuable tax-saving tools available to businesses. It allows companies to immediately deduct a large portion or even the entire cost of qualifying assets rather than depreciating those assets over several years.

After a scheduled phase-down began in 2023, many business owners expected bonus depreciation benefits to continue shrinking. However, recent legislation significantly changed the landscape and restored 100% bonus depreciation for qualifying property acquired after January 19, 2025.

What Is Bonus Depreciation?

Bonus depreciation, formally known as the additional first-year depreciation deduction under Internal Revenue Code Section 168(k), allows businesses to write off a substantial percentage of eligible asset costs in the year the asset is placed into service.

Unlike regular depreciation, which spreads deductions across an asset’s useful life, bonus depreciation accelerates those deductions, potentially reducing taxable income immediately.

How the Phase-Down Worked

Under the Tax Cuts and Jobs Act (TCJA), businesses could claim:

• 100% bonus depreciation through 2022

• 80% in 2023

• 60% in 2024

• 40% in 2025

• 20% in 2026

• 0% in 2027 (under the original schedule)

The purpose of the phase-down was to gradually reduce the tax benefit over time.

The Major Change for 2025 and Beyond

Congress reversed the scheduled reduction through legislation enacted in 2025. For qualified property acquired and placed in service after January 19, 2025, businesses may once again claim a permanent 100% bonus depreciation deduction.

This means many businesses can immediately expense the entire cost of qualifying equipment and assets instead of waiting years to recover those costs through traditional depreciation.

What Property Qualifies?

Generally, bonus depreciation may apply to:

• Machinery and equipment

• Computers and technology hardware

• Certain business vehicles

• Manufacturing equipment

• Qualified improvement property

• Certain software

• Qualified film, television, theatrical, and sound recording productions

Most tangible property with a recovery period of 20 years or less remains eligible.

The Transition Rules

Not all assets receive the same treatment.

For property acquired before January 20, 2025 and placed in service during 2025, the bonus depreciation rate generally remains 40%. Certain long-production-period property and aircraft may qualify for a 60% rate.

For property acquired after January 19, 2025, the deduction generally returns to 100%, assuming all other qualification requirements are met.

Bonus Depreciation vs. Section 179

Business owners often confuse bonus depreciation with the Section 179 deduction, but they operate differently.

Bonus Depreciation

• Generally applies automatically unless elected out

• Can create or increase a net operating loss

• No annual dollar limitation

• Available for most qualifying assets

Section 179

• Requires an election

• Subject to annual deduction limits

• Phases out for large equipment purchases

• Limited by taxable business income in many cases

Many businesses use a combination of both strategies to maximize deductions.

Planning Opportunities for Business Owners

The return of 100% bonus depreciation creates several planning opportunities:

Equipment Purchases

Businesses considering equipment upgrades may benefit from accelerating purchases into the current tax year.

Manufacturing Expansion

Manufacturers investing in machinery, production equipment, and certain facility improvements may generate significant first-year deductions.

Real Estate Cost Segregation Studies

Commercial real estate investors often use cost segregation studies to identify shorter-life assets that may qualify for bonus depreciation, creating substantial upfront tax deductions.

Cash Flow Management

Reducing current-year tax liability can improve cash flow and free up capital for reinvestment.

Important Considerations

• Bonus depreciation is powerful, but it is not always the best choice.

• Accelerating deductions today means fewer depreciation deductions in future years. Businesses expecting higher tax rates or significantly higher income in future years may benefit from modeling multiple scenarios before claiming the deduction.

• Additionally, state tax treatment varies. Some states do not fully conform to federal bonus depreciation rules, which can affect overall tax planning.

Final Thoughts

The restoration of 100% bonus depreciation represents a major tax-planning opportunity for businesses investing in equipment, technology, manufacturing assets, and other qualifying property. While the rules can be complex, the ability to immediately deduct eligible purchases can generate substantial tax savings and improve cash flow.

Before making major purchasing decisions, business owners should work with a qualified tax advisor to determine eligibility, evaluate state tax implications, and ensure the strategy aligns with their long-term financial goals.