Yes, bonus depreciation can create a net operating loss. Because the deduction has no income-based cap, it can exceed your business income and drive taxable income below zero. Whether you can actually use that loss in the current year is a separate question, governed by basis rules, at-risk rules, passive activity limits, and the excess business loss cap. Anything blocked by those rules is not lost; it carries forward.
Why Bonus Depreciation Can Produce a Loss
Standard depreciation spreads an asset’s cost across its recovery period, producing a modest annual deduction. Bonus depreciation front-loads the entire cost into the first year the property is placed in service. Under the One Big Beautiful Bill Act, 100% bonus depreciation is permanently reinstated for qualifying property acquired and placed in service after January 19, 2025, which means a single large purchase can wipe out an otherwise healthy year of income.1Internal Revenue Service. One, Big, Beautiful Bill Provisions
A simple example makes the mechanics obvious. Your business earns $80,000 in revenue and has $30,000 in operating expenses. You buy $200,000 in equipment eligible for 100% bonus depreciation. Total deductions come to $230,000 against $80,000 of income, leaving a $150,000 net operating loss.2Office of the Law Revision Counsel. 26 USC 168: Accelerated Cost Recovery System
This is the key contrast with Section 179 expensing. Section 179 cannot reduce your business income below zero; if your income before the deduction is $40,000, your Section 179 expense stops at $40,000, and the rest carries to a future year with enough income to absorb it. Bonus depreciation has no such floor. That is precisely why it can generate an NOL, and why many taxpayers apply Section 179 first up to the income limit and then use bonus depreciation on remaining eligible property to push into a loss position.
Whether You Can Actually Deduct the Loss
Generating a loss on paper is not the same as using it. Four sets of rules apply in a specific order: basis, then at-risk, then passive activity, then the excess business loss cap.
Basis Limitations for Pass-Through Owners
A partner’s share of losses, including losses driven by bonus depreciation, is deductible only up to the partner’s adjusted basis in the partnership. Basis generally includes cash contributed, property contributed, and a share of partnership debt. Losses above basis are suspended and carry forward until basis is restored, typically by additional contributions.3CCH AnswerConnect. IRC 704(d), Limitation on Allowance of Losses
S corporation shareholders face the same concept with a narrower scope. Losses are deductible up to stock basis plus any amount the shareholder personally loaned to the corporation. A general corporate loan from a bank does not increase shareholder basis.4Office of the Law Revision Counsel. 26 USC 1366: Pass-Thru of Items to Shareholders Suspended amounts carry forward indefinitely.
At-Risk Rules
After basis, losses must clear the at-risk test. You can deduct only up to the amount you could actually lose from the activity, generally cash invested plus amounts you personally borrowed for the activity.5Office of the Law Revision Counsel. 26 USC 465: Deductions Limited to Amount at Risk Financing an asset with a nonrecourse loan, where you have no personal liability on default, typically does not add to the at-risk amount. Blocked losses carry forward and become deductible in the first year the at-risk amount is sufficient.
Passive Activity Rules
Losses that survive basis and at-risk then meet the passive activity filter. A passive activity is any business in which you do not materially participate on a regular, continuous, and substantial basis.6Office of the Law Revision Counsel. 26 USC 469: Passive Activity Losses and Credits Limited Passive losses, including those driven by bonus depreciation, can offset only other passive income. They cannot reduce wages, portfolio income, or income from active businesses.
Rental real estate is automatically passive regardless of hours spent, with two exceptions. Active participation in a rental (making decisions on tenants, repairs, and lease terms) allows up to $25,000 of rental losses against non-passive income, phased out as adjusted gross income moves from $100,000 to $150,000. Qualifying as a real estate professional (more than 750 hours per year in real property businesses and more than half of working time devoted to them) removes the automatic passive classification for rentals.7Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Disallowed passive losses carry forward and become deductible when you generate passive income or sell the entire activity in a taxable transaction, at which point all accumulated suspended losses are released at once.
The Excess Business Loss Cap
Individuals face one final ceiling before a business loss offsets non-business income such as wages, interest, or dividends. For 2026, the cap is $256,000 for single filers and $512,000 for joint filers.8Internal Revenue Service. Revenue Procedure 2025-32 The statutory base is $250,000 (doubled for joint returns), indexed to the consumer price level starting in 2026.9Legal Information Institute. 26 USC 461(l)(3) – Excess Business Loss
Losses above the threshold are classified as excess business losses. They are not lost; the disallowed amount converts to a net operating loss carryforward.10Internal Revenue Service. 2025 Instructions for Form 461 If a joint filer generates a $700,000 business loss in 2026 after netting business income, $512,000 offsets wages and other non-business income in the current year and the remaining $188,000 becomes an NOL carryforward.
What Happens to an NOL Carryforward
When bonus depreciation produces an NOL that survives the limitations above, the unused portion carries forward indefinitely until fully used.11Office of the Law Revision Counsel. 26 USC 172: Net Operating Loss Deduction Two constraints matter. NOLs arising in tax years after 2017 generally cannot be carried back for a refund, with a narrow exception for certain farming losses.12Internal Revenue Service. Instructions for Form 172 (12/2024) And when you apply a post-2017 NOL in a later profitable year, the deduction is limited to 80% of that year’s taxable income. The remaining 20% is always taxed, and the unused NOL keeps carrying forward.
The practical takeaway: bonus depreciation does not eliminate future taxes outright. It builds a long-term shield that can reduce taxable income by up to 80% each year until the carryforward is exhausted. Track the NOL balance every year, because you must report it on each return where you apply it.
Recapture When the Asset Is Sold
A loss taken now can partially reverse later. Deducting 100% of an asset’s cost through bonus depreciation drops adjusted basis to zero. If you later sell that asset for any amount above zero, the gain up to the amount of depreciation previously deducted is recaptured and taxed as ordinary income, not at capital gains rates.13Office of the Law Revision Counsel. 26 USC 1245: Gain From Dispositions of Certain Depreciable Property
Consider equipment bought for $100,000, fully expensed through bonus depreciation, and later sold for $40,000. The entire $40,000 is ordinary income. The net benefit is still meaningful (a $100,000 deduction against $40,000 of later ordinary income), but the upfront savings are not permanent if the asset is later sold for a real price. Timing dispositions around your income level can soften the recapture hit.
When Electing Out Makes Sense
Creating a big loss is not always the right move. If your current income is low but expected to climb, spreading depreciation across the recovery period may beat taking the full deduction now, particularly since the 80% NOL limitation dilutes the value of a carryforward. You can elect out of bonus depreciation on a class-by-class basis, for example opting out for five-year property while keeping it for seven-year property.2Office of the Law Revision Counsel. 26 USC 168: Accelerated Cost Recovery System
The election is made on a timely filed return (including extensions) for the year the property is placed in service, and once made it is irrevocable without IRS consent. Taxpayers who placed property in service during their first tax year ending after January 19, 2025, also have a one-time option to apply the prior-law 40% rate instead of 100% for that transition year.14Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
State Conformity Is a Separate Question
Federal bonus depreciation does not automatically flow to your state return. A number of states decouple from the federal rules and require an add-back for all or part of the deduction when computing state taxable income. Several states enacted new decoupling legislation in 2025 in response to the OBBB’s reinstatement of 100% bonus depreciation. In a non-conforming state, a large federal loss driven by bonus depreciation may barely dent your state tax bill. Confirm your state’s current conformity status before treating a federal NOL as a full picture of your tax position.