Bonus Depreciation Under Section 168(k): Elections and Recapture

Bonus depreciation under Section 168(k) lets a business deduct the full cost of qualifying property in the year it’s placed in service instead of spreading that cost across years of standard depreciation. After the One, Big, Beautiful Bill, the 100% deduction is permanent for eligible property acquired after January 19, 2025.¹ That reverses the phase-down that had cut the deduction to 80% in 2023 and 60% in 2024 and would have taken it to 40% in 2025, 20% in 2026, and zero by 2027.

Why the Acquisition Date Controls Everything

The restored 100% rate turns on when you acquired the property, not when you placed it in service. “Acquired” generally means the date you entered a binding purchase contract, or for self-constructed property, when you began manufacturing or construction. Acquire after January 19, 2025, and the full 100% applies whenever you later place the asset in service.

Property acquired on or before January 19, 2025, stays on the original TCJA phase-down, even if you don’t place it in service until 2026 or later.² Under that older schedule:

2023: 80%
2024: 60%
2025: 40%
2026: 20%
2027 and beyond: 0%

The distinction is real money. If you signed a binding contract on January 15, 2025, and installed the equipment in March 2026, your bonus depreciation is capped at 20% of the basis. The remaining 80% recovers under normal MACRS over the asset’s recovery period. Businesses that ordered equipment in late 2024 or the first days of 2025 need to check their contract dates carefully.

What Property Qualifies

Section 168(k) treats several categories as “qualified property.” The broadest is tangible personal property with a MACRS recovery period of 20 years or less. That sweeps in most business equipment: manufacturing machinery, tools, office furniture, computers. Computer software depreciable under Section 167(a) and water utility property qualify. So do qualified film, television, live theatrical, and sound recording productions meeting Section 181 requirements.²

Qualified improvement property (interior improvements to nonresidential buildings, though not elevators or building enlargements) carries a 15-year MACRS recovery period and qualifies. Every asset must be used more than 50% for business.³

Used property qualifies too, as long as you hadn’t previously used it and didn’t buy it from a related party.³ A used forklift bought at auction gets the same deduction as a new one. The related-party rule blocks businesses from moving assets between affiliates to generate fresh deductions.

Land and buildings don’t qualify. Land isn’t depreciable, and most buildings have recovery periods well past 20 years (27.5 years for residential rental, 39 years for nonresidential real property). Inventory doesn’t qualify either.

Vehicle Limits Under Section 280F

Passenger vehicles are eligible, but Section 280F caps the annual deduction for cars, trucks, and vans with a gross vehicle weight rating of 6,000 pounds or less. For passenger automobiles placed in service during 2026 with bonus depreciation, the limits are:⁴

First year: $20,300
Second year: $19,800
Third year: $11,900
Each year after: $7,160

Without bonus depreciation, the first-year limit drops to $12,300; later years stay the same.⁴ Bonus depreciation adds $8,000 to the first-year deduction on a passenger car, but the total purchase price cannot be written off in one year the way equipment can.

Heavy vehicles above the 6,000-pound rating fall outside the Section 280F caps. A qualifying SUV, pickup, or van over that weight can take the full bonus depreciation with no dollar ceiling, provided business use exceeds 50%. Only the business-use share of cost is deductible.

Section 179 or Bonus Depreciation

Section 179 offers a similar first-year write-off, but the two work differently. On Form 4562, Section 179 is applied first, then bonus depreciation on any remaining cost, then regular MACRS on whatever is left.⁵

The main difference: Section 179 cannot create or increase a net operating loss. Your Section 179 deduction is capped at total taxable income from all your active trades or businesses.⁶ Excess disallowed amounts carry forward. Bonus depreciation has no income limit and can generate a net operating loss you carry forward against future income.

Section 179 also has a maximum deduction (roughly $2.5 million for 2025, inflation-adjusted) and phases out dollar-for-dollar once qualifying property placed in service exceeds about $4 million.⁵ Bonus depreciation has no spending cap.

Section 179 does allow more granular control. You pick which assets to expense and how much. Bonus depreciation applies automatically to every qualifying asset in a class unless you elect out for the entire class.

When Electing Out Makes Sense

Section 168(k)(7) permits an election out of bonus depreciation for any class of property placed in service during the year. The election covers the whole class, not individual assets. You make it by attaching a statement to your timely filed return, including extensions.² Once made, it can be revoked only with IRS consent.

Several situations argue against taking the deduction. A business already showing a loss gains nothing by piling on more current-year deductions. Partnerships and S corporations sometimes elect out to avoid creating losses that exceed owners’ basis, which would suspend the deduction at the owner level. Businesses expecting higher tax rates in future years may prefer to spread deductions where each dollar saves more tax.

State treatment is another reason. Many states don’t conform, so a big federal deduction can create sizeable state add-backs and timing headaches.

How to Claim It

Start with the asset’s cost basis: purchase price plus sales tax, delivery, and installation. Pin down the placed-in-service date, which is the date the property is ready and available for its intended use, not the purchase date. Equipment sitting uninstalled at year-end doesn’t count until it’s operational. For mixed-use assets, only the business-use percentage generates a deduction. A vehicle used 70% for business gives a deduction based on 70% of cost.

The deduction goes on Form 4562, Part II. Enter the basis and placed-in-service date, then apply the applicable percentage (100% for most property acquired after January 19, 2025) to the business-use portion of basis.⁵

Form 4562 attaches to your primary return. Sole proprietors and single-member LLCs carry the total to Line 13 of Schedule C (Form 1040).⁷ Corporations attach it to Form 1120; partnerships attach it to Form 1065. Tax software connects these automatically once the asset information is entered.

Recapture When You Sell

The upfront deduction has a back-end cost. When you sell an asset that received bonus depreciation, gain up to the amount of depreciation claimed is taxed as ordinary income under Section 1245, not at capital gains rates.⁸

Buy a $100,000 machine, deduct the full cost through bonus depreciation, and your basis drops to zero. Sell it two years later for $60,000 and the entire $60,000 gain is ordinary income, because it doesn’t exceed the $100,000 previously deducted. Sell it for $120,000 and the first $100,000 is ordinary income, with the remaining $20,000 treated as Section 1231 gain, which qualifies for long-term capital gains treatment if held more than a year.⁹

Report the sale and recapture on Form 4797, Part III. The instructions require you to include bonus depreciation in the total depreciation previously allowed.¹⁰ Businesses that trade equipment or vehicles on short cycles should build recapture into the plan; the tax savings are partially deferred rather than eliminated when sale prices exceed depreciated basis.

State Conformity

Federal and state rules often diverge. About 15 states conform fully to Section 168(k), letting the deduction flow to the state return without adjustment. Several allow a fraction of the federal deduction, and a few have their own permanent full-expensing rules. The rest require a partial or full add-back.

In an add-back state, you lose the timing benefit at the state level. You add the bonus depreciation back to state taxable income in the year of the federal deduction, then take normal MACRS depreciation on the state return over the recovery period. The difference is temporary rather than permanent, but it cuts the immediate cash-flow benefit and complicates the books. Multi-state businesses face the tangle of different rules on the same asset.

Records to Keep

Keep depreciation records until the statute of limitations expires for the tax year in which you dispose of the asset.¹¹ Buy a machine in 2026, depreciate it that year, sell it in 2035, and you need the original purchase file through at least 2038 or 2039. For the entire ownership period, keep the purchase invoice, proof of the placed-in-service date, business-use records, and documentation of basis-increasing improvements.

If the asset came through a tax-free exchange, basis carries over from the old property, so you need records for both.¹² A running depreciation schedule tracking each asset, its basis, the deduction claimed, and the disposition date makes audits far easier. The IRS in an audit will want to see not only the purchase, but the placed-in-service date and the primary business use during the deduction year.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
4
Internal Revenue Service. Rev. Proc. 2026-15
5
Internal Revenue Service. Instructions for Form 4562
6
eCFR. 26 CFR 1.179-2 – Limitations on Amount Subject to Section 179 Election
7
Internal Revenue Service. Instructions for Schedule C (Form 1040)
8
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
9
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
10
Internal Revenue Service. Instructions for Form 4797
11
Internal Revenue Service. Topic No. 305, Recordkeeping
12
Internal Revenue Service. How Long Should I Keep Records