Yes. Off-the-shelf computer software is eligible for bonus depreciation, and under current law a business can deduct 100% of the cost in the year the software is placed in service. The One, Big, Beautiful Bill, signed July 4, 2025, made the full first-year write-off permanent for qualified property acquired after January 19, 2025, and the statute expressly names computer software as qualifying.1Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill2Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
The catch is what counts as software for this purpose. Not every program a business pays for is depreciable property, and several common arrangements sit outside the rules entirely.
Which Software Qualifies
The tax code carves out a specific category: off-the-shelf computer software, defined by reference to Section 197(e)(3). To qualify, the software must meet three tests.3Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
- It must be readily available for purchase by the general public, not built to order for your company.
- It must be subject to a nonexclusive license. If you negotiated exclusivity, it fails the test.
- It must not have been substantially modified. Configuration is fine; a vendor rewriting major features to fit your operations is not.
The everyday examples fit easily: accounting programs, spreadsheets, word processors, cybersecurity suites, project management platforms sold as installed software. The IRS treats this software as depreciable property under Section 167(f)(1), with a default 36-month straight-line recovery when bonus depreciation doesn’t apply.4Office of the Law Revision Counsel. 26 USC 167 – Depreciation
One practical trap: software bundled with hardware on a single invoice. If the software isn’t broken out as a separate line item, the IRS may treat the whole package as five-year MACRS computer property. A separate line on the purchase records avoids that.
What Doesn’t Qualify
Three categories that businesses commonly assume are covered are not.
SaaS and Cloud Subscriptions
When you pay a monthly or annual fee for cloud software and lose access the moment you stop paying, you haven’t acquired property. You’re renting. Those payments are ordinary business expenses deductible in the year paid or incurred, similar to office rent. There is no depreciation schedule because there is no asset. This covers most modern cloud accounting, CRM, and project management tools billed by subscription.
Internally Developed Software
Software your company builds in-house follows a different regime. Since 2022, Section 174 requires software development costs to be capitalized and amortized over five years for domestic development, or 15 years for work performed outside the United States, regardless of project size.5Internal Revenue Service. Notice 2023-63 – Guidance on Amortization of Specified Research or Experimental Expenditures Under Section 174 You cannot expense these costs immediately, and bonus depreciation does not apply. Amortization begins at the midpoint of the tax year the costs are paid or incurred, even if the software isn’t finished.
Software Acquired With a Business
Software picked up as part of buying an entire business or a substantial portion of one is generally a Section 197 intangible, amortized straight-line over 15 years with no bonus depreciation. The exception: if the software meets the off-the-shelf tests above, it keeps its bonus depreciation eligibility even inside a business acquisition.3Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
Other Conditions You Have to Meet
Owning qualifying software isn’t enough on its own.
Placed in service. The software must be installed, functional, and available for use in your business during the tax year. Buying a license in December but not installing it until February shifts the deduction into the later year. The IRS looks at when the software is ready for its intended purpose, not when payment clears.6Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
Business use. The software must be used in your trade or business. If you use it for both business and personal purposes, only the business-use percentage of the cost is eligible.
New to you. Used software qualifies, but you cannot have used it at any time before acquiring it. The purchase also cannot come from a party whose relationship to you would disqualify losses under Section 267 (broadly, close family or entities you control), and your basis cannot be determined by reference to the seller’s basis, which rules out gifts and certain inherited property.7Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
The Current 100% Rate and Its Transitional Exceptions
Amended Section 168(k)(1)(A) provides a first-year allowance equal to 100% of the adjusted basis of qualified property, with computer software as defined in Section 167(f)(1)(B) named as qualifying. A company spending $50,000 on qualifying software in 2026 can deduct the full $50,000 in the year the software goes into use.
Two situations produce a different result. Software that was acquired before January 20, 2025 but placed in service afterward is capped at a 40% bonus depreciation allowance, with the remaining cost recovered over the standard 36-month straight-line period.8Internal Revenue Service. Instructions for Form 4562 (2025) And a taxpayer whose first tax year ending after January 19, 2025 includes qualifying software can elect to take only 40% bonus depreciation on that year’s qualifying property, which for calendar-year filers means software placed in service during 2025. A business expecting sharply higher income later might prefer that election to save deductions for those years. Once the election window closes, the default 100% rate applies with no option to voluntarily reduce it.
Bonus Depreciation vs. Section 179 for Software
Off-the-shelf computer software also qualifies for the Section 179 expensing election.6Internal Revenue Service. Publication 946 (2024), How To Depreciate Property With bonus depreciation back at 100%, both routes can produce a full first-year write-off, but they behave differently.
- Section 179 has an annual dollar cap (indexed for inflation; $1,250,000 for 2026) and phases out when total qualifying property placed in service exceeds a set threshold. Bonus depreciation has no dollar ceiling.
- A Section 179 deduction cannot exceed your business’s taxable income for the year; the excess carries forward. Bonus depreciation has no income limitation and can create or increase a net operating loss.
- The IRS applies Section 179 first, then bonus depreciation on the remaining basis, then regular depreciation.
The net-operating-loss point is the practical one. A startup or a business in a down year making a large software investment can use bonus depreciation to generate a loss that carries forward against future income. Section 179 stops at zero taxable income for the year.
How to Claim It, and What Happens on a Later Sale
Bonus depreciation for software is reported on Form 4562, Depreciation and Amortization, on Line 14 in Part II (special depreciation allowance).9Internal Revenue Service. Form 4562 – Depreciation and Amortization (2025) You provide a description of the property, the date placed in service, and the cost basis. The total flows to your main return: Form 1120 for C corporations, Form 1065 for partnerships, Schedule C for sole proprietors.10Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization If you’re claiming Section 179 on the same purchase, report that portion in Part I first; bonus depreciation in Part II applies to the remaining basis.
You can decline bonus depreciation by attaching a statement to your timely filed return (including extensions) for the year the software is placed in service. The election is made by class of property, so opting out for computer software covers all qualifying software placed in service that year; you cannot pick and choose within the class.4Office of the Law Revision Counsel. 26 USC 167 – Depreciation
One trade-off is built in. Software is Section 1245 personal property, so if you later sell it for more than its adjusted basis (zero after a full write-off), the gain is recaptured as ordinary income up to the amount of depreciation previously claimed, taxed at your ordinary rate rather than the capital gains rate. Off-the-shelf software usually loses resale value fast, so recapture rarely produces a large hit. Businesses that buy transferable enterprise licenses worth significant sums should plan for ordinary-income treatment if those licenses are ever sold or transferred.