To calculate bonus depreciation, subtract any Section 179 deduction you’re claiming on the asset from its cost basis, then multiply the remainder by the bonus depreciation percentage that applies to your acquisition date. For most qualifying property acquired after January 19, 2025, that percentage is 100%, so the entire remaining basis is deducted in the year the asset is placed in service.1Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
The formula itself is short:
(Cost Basis − Section 179 Deduction) × Bonus Depreciation Percentage = Bonus Depreciation Deduction
The work is in getting the three inputs right. The percentage depends on when you acquired the property, not when you placed it in service, and the cost basis has to include everything you spent to get the asset ready for use.
Find the Right Bonus Depreciation Percentage
The One Big Beautiful Bill Act, enacted in 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025.2Internal Revenue Service. One, Big, Beautiful Bill Provisions There’s no sunset date on the current rate.
If you acquired the asset on or before January 19, 2025, the old phase-down schedule still controls, keyed to the year the asset is placed in service:
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 and later: 0%
For the first tax year ending after January 19, 2025, calendar-year taxpayers can make a one-time election to claim 40% instead of 100%, or 60% for longer-production-period property and certain aircraft.3Internal Revenue Service. Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction That election exists for businesses that would rather spread deductions out than take everything in year one.
Step 1: Determine the Cost Basis
Your cost basis is the total amount you paid to acquire the asset and get it ready for use. That includes the purchase price, shipping, sales tax (if you didn’t deduct it separately), and installation costs. Add those figures together before you touch the formula.
Step 2: Subtract Any Section 179 Deduction
If you’re also claiming a Section 179 deduction on the same asset, subtract it from the cost basis first. The IRS requires Section 179 to be applied before bonus depreciation.4Internal Revenue Service. Instructions for Form 4562 (2025) For 2026, the maximum Section 179 deduction is $2,560,000, with phase-out beginning when total qualifying purchases exceed $4,090,000.
Many small businesses use the two provisions together, either on different assets or stacked on the same asset. If you’re not claiming Section 179 on the asset, this step is just a zero and you move on.
Step 3: Apply the Bonus Depreciation Percentage
Multiply what’s left after the Section 179 subtraction by the applicable bonus percentage.
Example at 100%
A business buys a $100,000 piece of equipment in 2026 and acquired it after January 19, 2025. No Section 179 is claimed on the asset. The math: $100,000 × 100% = $100,000. The entire cost is deducted in year one and nothing is left to depreciate going forward.
Example under the Phase-Down
A business bought a $100,000 asset before January 20, 2025, and places it in service in 2026, so the 20% phase-down rate applies. It also claims a $30,000 Section 179 deduction on the asset. The math: ($100,000 − $30,000) × 20% = $14,000 in bonus depreciation. The remaining $56,000 is depreciated over the asset’s MACRS recovery period using regular depreciation.
Passenger Vehicles: Watch the Dollar Caps
Passenger vehicles qualify for bonus depreciation, but annual dollar caps limit what you can actually deduct no matter what the formula produces. For vehicles placed in service in 2026 where bonus depreciation applies, the maximum first-year deduction is $20,300. Subsequent-year caps are $19,800 in year two, $11,900 in year three, and $7,160 for each year after until the vehicle is fully depreciated.5Internal Revenue Service. Rev. Proc. 2026-15 Without bonus depreciation, the first-year cap is $12,300 and the later-year numbers are the same.
These caps don’t apply to vehicles with a gross weight above 6,000 pounds that aren’t designed primarily for passenger use. Those heavier trucks and SUVs follow the regular bonus depreciation rules.
Vehicles are also listed property, which means business use has to be above 50% to qualify for bonus depreciation at all. If business use drops to 50% or below, you lose the special allowance and have to switch to straight-line depreciation.6Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
Confirm the Property Qualifies Before You Calculate
Bonus depreciation under Section 168(k) covers tangible property with a MACRS recovery period of 20 years or less: machinery, equipment, office furniture, production tools, and off-the-shelf computer software.7Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Qualified improvement property counts too, meaning interior improvements to nonresidential buildings made after the building was first placed in service, like new lighting, flooring, or interior walls. Building enlargements, elevators, escalators, and structural changes don’t qualify.6Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
Used property qualifies as long as you haven’t previously used it yourself and you acquire it in an arm’s-length transaction meeting the related-party and prior-use rules under Section 179(d).8Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
Property depreciated under the Alternative Depreciation System is excluded, which pulls out nonresidential real property, residential rental property, and qualified improvement property held by a business that elected out of the Section 163(j) interest-expense limitation. Buildings themselves don’t qualify because their recovery period exceeds 20 years. Property used by regulated utilities that don’t follow a normalization method of accounting is also out.
Where to Report the Deduction
Report bonus depreciation on Form 4562, Depreciation and Amortization, attached to your federal income tax return.9Internal Revenue Service. About Form 4562, Depreciation and Amortization For standard business assets, the bonus depreciation amount goes on Part II, line 14.10Internal Revenue Service. Form 4562 – Depreciation and Amortization Sole proprietors and single-member LLCs file it with Form 1040. Corporations use Form 1120, S corporations Form 1120-S, and partnerships Form 1065.4Internal Revenue Service. Instructions for Form 4562 (2025)
Bonus depreciation is automatic. You get it unless you file an election out, which requires attaching a statement to a timely filed return identifying the class of property. The election applies to the entire class placed in service that year, not individual assets, and once made can’t be revoked without IRS consent.
Keep purchase receipts, invoices, shipping records, and installation documentation for as long as you own the asset, plus the limitations period for the year you dispose of it. The IRS can revisit depreciation basis when you eventually sell.11Internal Revenue Service. How Long Should I Keep Records
If You Missed the Deduction in a Prior Year
If you placed an asset in service in a prior year and didn’t claim bonus depreciation, you generally can’t fix it with an amended return. The IRS treats the shift from an incorrect depreciation method to the correct one as a change in accounting method, which calls for Form 3115.12Internal Revenue Service. Instructions for Form 3115
Most depreciation corrections qualify for the automatic change procedure, so no advance IRS approval or user fee is needed. You attach Form 3115 to a timely filed return for the year you want to make the change and file a copy with the IRS National Office. The correction catches up all missed depreciation through a single Section 481(a) adjustment in the year of change, rather than requiring you to amend every prior year.
State Taxes May Not Follow the Federal Number
The deduction you calculate flows through to your federal return, but many states don’t conform to federal bonus depreciation. Those states require an add-back of part or all of the federal deduction on the state return and use the state’s own depreciation schedule instead, meaning a higher state tax bill in the purchase year offset by larger state deductions later. Check your state’s rules before assuming the full federal deduction will reduce both bills.