History of Bonus Depreciation: TCJA, Phase-Down, and OBBBA

The history of bonus depreciation runs from a 30% emergency deduction enacted after September 11, 2001, through two decades of expirations, revivals, and rate changes, to the One, Big, Beautiful Bill Act of 2025, which restored a 100% first-year deduction and, for the first time, made it permanent for qualifying property acquired after January 19, 2025.¹ The rate that applies to any specific asset still depends on when it was acquired and when it was placed in service, so the chronology matters for anything purchased in the past several years.

The MACRS Baseline Bonus Depreciation Sits On

Since the mid-1980s, the Modified Accelerated Cost Recovery System (MACRS) has been the standard method businesses use to deduct the cost of long-lived assets over time. MACRS front-loads deductions compared with a straight-line method, but it still measures the deduction in years. A piece of equipment classified as seven-year property yields a first-year deduction of only about 14.29% of its cost under the standard 200% declining balance method with the half-year convention.

That pace is fine for routine tax planning. It was never designed to push a business to buy equipment this quarter instead of next year. Bonus depreciation was built as an extra layer on top of MACRS: a fixed percentage of the asset’s cost gets deducted immediately, and whatever remains is depreciated on the normal MACRS schedule.

The First Bonus Depreciation (2002–2004)

Bonus depreciation arrived as a direct response to the downturn that followed the dot-com collapse and the September 11 attacks. Capital spending had stalled, and Congress wanted a tool that could pull investment decisions forward. The Job Creation and Worker Assistance Act of 2002 created a special depreciation allowance equal to 30% of a qualifying asset’s depreciable basis for property placed in service after September 10, 2001.² A business buying a $100,000 machine could deduct $30,000 immediately, then start the regular MACRS clock on the remaining $70,000.

When recovery stayed sluggish, Congress raised the rate. The Jobs and Growth Tax Relief Reconciliation Act of 2003 bumped bonus depreciation from 30% to 50% and extended the window for qualifying purchases through the end of 2004.³ Both laws included firm sunset dates. The message was spend now or lose the benefit. After 2004, bonus depreciation expired and the code reverted to standard MACRS.

The Recession-Era Revival (2008–2015)

Bonus depreciation sat dormant for a few years before the 2008 financial crisis brought it back. The Economic Stimulus Act of 2008 reintroduced the 50% first-year allowance for property placed in service during calendar year 2008.⁴ The Joint Committee on Taxation estimated at the time that businesses would lower their 2008 tax bills by roughly $45 billion through this provision and a companion increase to Section 179 expensing.

What followed was a cycle of last-minute extensions. Congress would let bonus depreciation approach expiration, then renew it, sometimes retroactively, for another year or two:

The Small Business Jobs Act of 2010 extended the 50% rate through the end of that year.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily raised the rate to 100% for property placed in service between September 9, 2010 and December 31, 2011, before reverting to 50%.
The American Taxpayer Relief Act of 2012 kept the 50% rate alive.

This pattern made capital budgeting past a few months out difficult. The Protecting Americans from Tax Hikes (PATH) Act of 2015 finally imposed some structure. It locked in 50% bonus depreciation through 2017 and set a defined phase-down of 40% in 2018 and 30% in 2019, with expiration at the end of 2019.⁵ The question of whether bonus depreciation should become permanent had been debated for years. The PATH Act’s answer was essentially “not yet, but here is a longer runway.”

The 100% Era Under the Tax Cuts and Jobs Act (2017)

The Tax Cuts and Jobs Act of 2017 pushed bonus depreciation to full expensing. For qualifying property acquired and placed in service after September 27, 2017, businesses could deduct 100% of the cost in year one.⁶ A company buying a $2 million piece of equipment no longer needed to track a depreciation schedule for that asset. The entire cost hit the return in the year the equipment went into service.

The TCJA also expanded eligibility to used property for the first time. Under prior law, only brand-new assets qualified. After the TCJA, a business could claim the full deduction on a used asset as long as the taxpayer had not previously used it, the seller was not a related party, and the purchase price was not determined by reference to the seller’s adjusted basis.⁶ This opened bonus depreciation up to second-hand equipment acquisitions and business purchases.

The 100% rate was not permanent. The TCJA built in a phase-down that would begin after 2022, dropping the rate by 20 percentage points each year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after that. Full expensing was treated as a time-limited incentive, not a permanent feature of the code.

The QIP Drafting Error and the CARES Act Fix

The TCJA also created one of the more conspicuous drafting errors in recent tax legislation. Congress intended to give qualified improvement property (QIP), meaning interior improvements to nonresidential buildings such as new lighting, drywall, or drop ceilings, a 15-year recovery period, which would have made it eligible for bonus depreciation. A drafting mistake instead left QIP with a 39-year recovery period, making it ineligible. Businesses that had already planned renovations based on the expected tax treatment were stuck.

The CARES Act of 2020 corrected this, retroactively assigning QIP the intended 15-year recovery period for property placed in service after 2017. Because any MACRS property with a recovery period of 20 years or less qualifies for bonus depreciation, the fix meant that most post-2017 QIP retroactively became eligible for 100% first-year expensing. Businesses that had already filed returns without claiming the deduction could amend them or file accounting method changes to capture the benefit.

The Phase-Down Years (2023–2025)

Starting in 2023, the TCJA’s scheduled reduction kicked in. Property placed in service in 2023 was eligible for 80% bonus depreciation, dropping to 60% in 2024 and 40% in 2025. Each step down meant businesses had to absorb more of their capital costs over time through standard MACRS schedules rather than taking them all at once. The phase-down applied to property acquired after September 27, 2017 and before January 20, 2025.

For tax planners, the declining rate made the timing of asset purchases and the placed-in-service date more consequential than it had been under the flat 100% regime. A purchase accelerated into 2024 rather than 2025 picked up an extra 20 percentage points of immediate deduction.

The One, Big, Beautiful Bill Act: Permanent Full Expensing (2025)

On July 4, 2025, President Trump signed the One, Big, Beautiful Bill Act (OBBBA) into law.⁵ Section 70301 of the Act restored 100% bonus depreciation and made it permanent. The law applies to qualifying property acquired after January 19, 2025, with no scheduled expiration.¹

The OBBBA removed the phase-down percentages and the 2027 expiration date from Section 168(k) entirely, replacing the annual step-down with a flat, permanent 100% rate for property acquired after the January 19, 2025 effective date.¹ A business that buys and places qualifying equipment in service during 2026 can deduct the full cost in year one, just as it could during the 2018–2022 window.⁷

There is an acquisition-date wrinkle worth knowing. Property acquired between September 28, 2017 and January 19, 2025, but not placed in service until 2026, still falls under the old TCJA phase-down schedule, meaning it would receive only 20% bonus depreciation. The permanent 100% rate applies only to assets acquired after January 19, 2025. For most businesses buying new equipment in 2026, the distinction is academic. For long-lead-time assets ordered years ago and just now being delivered, the acquisition date controls which rate applies.¹

QIP Under the OBBBA

Qualified improvement property keeps its 15-year recovery period and remains eligible for bonus depreciation at the permanent 100% rate. Interior improvements to nonresidential buildings, such as new lighting systems, drywall, plumbing, and drop ceilings, can be fully deducted in the year they are placed in service, provided they were acquired after January 19, 2025. Enlargements to the building structure, elevators, escalators, and changes to the internal structural framework do not qualify.

What Property Qualifies Today

Bonus depreciation applies to a specific category of business assets. The property must be depreciable under MACRS with a recovery period of 20 years or less. In practice, that covers most tangible business equipment: machinery, computers, office furniture, vehicles, and manufacturing tools. It also covers certain computer software, water utility property, and qualified film, television, and live theatrical productions.

Property with a recovery period longer than 20 years, most notably buildings and their structural components under the 27.5-year or 39-year MACRS schedules, does not qualify. The exception is qualified improvement property, which Congress specifically assigned a 15-year life to bring it within the eligible range.

Passenger vehicles face special dollar caps regardless of the bonus depreciation rate. For 2026, the first-year depreciation limit on a passenger vehicle with the bonus deduction is $20,300. Without the bonus deduction, that limit drops to $12,300.⁸ Vehicles weighing more than 6,000 pounds gross vehicle weight rating are generally exempt from these luxury auto caps, which is why large SUVs and trucks remain popular business vehicle choices.

One boundary worth flagging: federal bonus depreciation does not automatically reduce state taxable income. Each state decides independently whether to conform to Section 168(k), and several large states have historically decoupled, requiring businesses to add back the federal deduction when computing state tax. The OBBBA’s permanent rate has reopened that question in state legislatures, so checking current conformity before relying on bonus depreciation for state-level cash flow planning is worth the time.

1
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction
2
Internal Revenue Service. Publication 3991 – Highlights of the Job Creation and Worker Assistance Act of 2002
3
U.S. Department of the Treasury. Effects of the Bonus Depreciation Provision in the Jobs and Growth Tax Relief Reconciliation Act of 2003
4
Internal Revenue Service. Business Provisions of the Economic Stimulus Act of 2008
5
Congress.gov. H.R.1 – 119th Congress (2025-2026)
6
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Rev. Proc. 2026-15