Can You Take Bonus Depreciation on Land Improvements?

Yes, you can claim bonus depreciation on land improvements, and under the One, Big, Beautiful Bill Act the deduction is back to 100% of cost in the first year for qualifying assets acquired after January 19, 2025.¹ The deduction only reaches improvements that have a determinable useful life and fall inside the 15-year MACRS class. Raw land, and the costs of getting raw land ready to build on, stay outside the deduction entirely.

Which Land Improvements Qualify

The rule that opens the door is the recovery period. Bonus depreciation under Section 168(k) is limited to property with a recovery period of 20 years or less, and land improvements sit in the 15-year class under Asset Class 00.3 of Revenue Procedure 87-56.²³ Each asset must actually wear out, decay, or become obsolete over time to be depreciable at all.⁴

Improvements that commonly fit the 15-year class include:

Paved surfaces such as parking lots, sidewalks, driveways, and roads
Fences and gates
Bridges, drainage facilities, non-municipal sewers, wharves, and docks
Shrubbery and trees planted close enough to a building that replacing the building would destroy them
Swimming pools, retaining walls, and radio or television transmitting towers

The 15-year period applies whether the asset is later classified as Section 1245 or Section 1250 property for recapture purposes, as long as it belongs in Asset Class 00.3.⁵

What Doesn’t Qualify

Land itself is treated as permanent. It doesn’t wear out, so it cannot be depreciated, and costs for clearing, grading, and general site preparation are capitalized into the land’s basis rather than deducted.⁴

Landscaping is where the line gets blurry. Trees and bushes planted along the outer edge of a lot with no tie to a specific structure are treated as permanent land preparation and are not depreciable. The same species planted next to a building, where replacing the building would require destroying the plantings, becomes a depreciable 15-year improvement.⁴ The classification is fact-specific, and the IRS expects the taxpayer to document why each cost belongs in one category or the other.

The 100% Rate and the Transitional Election

The OBBBA, signed into law in 2025, permanently set the bonus depreciation rate at 100% for qualified property acquired after January 19, 2025, with no scheduled expiration.¹ A business that builds a $200,000 parking lot in 2026 can deduct the full $200,000 in the year the lot is placed in service. IRS Notice 2026-11 confirmed that taxpayers substitute “100 percent” for the phase-down percentages that appeared in the older bonus depreciation regulations.⁶

There is a transitional wrinkle worth flagging. For qualified property placed in service during the first tax year ending after January 19, 2025, taxpayers can elect to deduct 40% instead of 100% (or 60% for certain long-production-period property).¹ The option exists because a full deduction in a low-income year can waste the benefit.

Property Acquired On or Before January 19, 2025

Improvements acquired on or before January 19, 2025, follow the older TCJA phase-down. That schedule dropped from 100% in 2022 to 80%, 60%, 40%, and 20% in the years that followed, reaching 0% after 2026. What controls is the acquisition date, meaning the date the binding contract was signed, not the placed-in-service date alone. A parking lot contracted for in December 2024 but not completed until mid-2026 is stuck at 20% bonus depreciation.⁶

Used Improvements and Placed-in-Service Timing

Bonus depreciation is no longer limited to brand-new construction. Used property qualifies as long as it is new to you, meaning you haven’t used it in your business before and you didn’t acquire it from a related party.⁷ Buy an existing commercial property and the fences, parking lot, and qualifying landscaping that came with it can support bonus depreciation, even though the prior owner installed them years earlier.

The improvement also has to be placed in service during your tax year. “Placed in service” means ready and available for its intended function, not still under construction or waiting on permits.⁷

Section 179 Is Not an Alternative Here

Property owners often ask whether they can use the Section 179 expense election on the same improvements. They cannot. The IRS excludes land and land improvements from Section 179, so parking lots, fences, pools, bridges, docks, and landscaping don’t qualify regardless of the annual dollar limit.⁴ Bonus depreciation under Section 168(k) is the only first-year expensing tool available for these assets. That has a practical upside: Section 179 is capped at business income, while bonus depreciation can create or increase a net operating loss that carries forward.

Electing Out

Taking the full 100% deduction is not always the best move. If income is low, a large first-year deduction can create an NOL that takes years to absorb. Spreading the same cost over 15 years of MACRS may produce more usable tax savings.

The election out applies to the entire MACRS class for the year, not to individual assets. Elect out for 15-year property and every land improvement placed in service that year loses bonus eligibility.⁷ The election is made by attaching a statement to a timely filed return (including extensions) identifying the class and stating that no bonus depreciation will be claimed. Once made, it cannot be revoked without IRS consent.⁸

Cost Segregation for Existing Buildings

When you buy a property outright, the purchase price covers land, the building, and every improvement together. Without breaking that price apart, most taxpayers end up depreciating land improvements as part of the building’s 39-year schedule and never claim bonus on them. A cost segregation study is the engineering-based analysis that separates 15-year land improvements from the building shell and from the non-depreciable land.

No statute requires one, but the burden of proof is on the taxpayer to show which assets qualify and when the costs were incurred. A documented study from a qualified engineer or CPA firm is the practical way to meet that burden if the return is examined. Study fees for standard commercial properties run into the low thousands, and reclassifying even a modest slice of the purchase price from 39-year to bonus-eligible 15-year property usually returns the fee several times over. For new construction, contractor invoices that itemize paving, fencing, and drainage costs give you most of what a retroactive study would produce.

Reporting on Form 4562

Bonus depreciation is claimed on Form 4562, which handles depreciation and amortization deductions.⁹ Part II, “Special Depreciation Allowance,” is where the bonus amount is calculated and reported. It is taken after any Section 179 deduction on other qualifying assets and before regular MACRS depreciation on the remaining basis.⁸ Each improvement is listed separately with its acquisition date, cost basis, recovery period, and the bonus percentage claimed. Form 4562 then attaches to your primary return, whether that is Form 1040 for a sole proprietor or individual investor, or Form 1120 for a C corporation.¹⁰ S corporations and partnerships file it with the entity return and pass the deduction through on Schedule K-1.

Recapture When You Sell

The front-loaded deduction has to be paid back in part when the property is sold. Every dollar of depreciation claimed reduces the property’s adjusted basis, which raises the taxable gain at disposition.¹¹

The tax treatment depends on how the improvement is classified. Most common land improvements, including parking lots, fences, and landscaping, are Section 1250 property because they are depreciable real property that doesn’t fit the Section 1245 categories.¹¹ Under Section 1250, depreciation claimed in excess of straight-line is recaptured as ordinary income, and the rest of the gain attributable to depreciation is taxed at up to 25% as unrecaptured Section 1250 gain. Because 100% bonus depreciation far exceeds what straight-line would have produced in a single year, ordinary income recapture on a short-hold sale can be significant. That is often the strongest reason to consider electing out: the math on holding period and expected bracket at sale can flip the answer.

State Conformity

Federal bonus depreciation does not automatically flow through to state returns. Many states have decoupled from Section 168(k) and require an add-back of some or all of the federal bonus deduction when calculating state taxable income. Some allow an alternative accelerated schedule; others require straight-line for state purposes. Check the conformity rules of every state where the property sits or where the entity files before assuming the state tax bill drops by the same amount as the federal one.

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 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Rev. Rul. 2001-60 – Depreciation of Golf Course Greens
4
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
5
Internal Revenue Service. PLR-148600-11 Regarding Classification of Cellular Antenna Towers Under Rev. Proc. 87-56
6
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction
7
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
8
Internal Revenue Service. 2025 Instructions for Form 4562
9
Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
10
Internal Revenue Service. Instructions for Form 1120 (2025)
11
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets