Is Software Eligible for Bonus Depreciation?

Off-the-shelf computer software qualifies for bonus depreciation, and if you acquire it and place it in service after January 19, 2025, you can deduct 100 percent of the cost in the first year under the One, Big, Beautiful Bill Act signed on July 4, 2025.¹ Software bonus depreciation is available only for programs you actually own and use in a trade or business. Cloud subscriptions and custom-built software follow separate rules, and the deduction percentage for older purchases depends on the year the program went into service.

What Counts as Qualifying Software

To claim bonus depreciation on software, the program has to meet four tests set out in IRS Publication 946 and the regulations under Section 168(k). It must be readily available to the general public, sold under a nonexclusive license, not substantially modified for your business, and used in your trade or business.² Programs that pass all four are commonly called off-the-shelf software.

The software also has to be placed in service during the tax year you claim the deduction. That means it is installed, functional, and available for its intended business use. Buying a license or taking delivery is not enough on its own. Keep records of the deployment date so you can support the timing if the IRS asks.³

Used and Bundled Software

Previously owned software qualifies too, as long as you did not use it before acquiring it, you did not buy it from a related party, and your cost basis is not determined by the seller’s adjusted basis.⁴ A perpetual license bought secondhand from an unrelated business can meet the requirements.

When software comes bundled with a computer or server and the invoice does not break out its cost, the software is depreciated with the hardware, typically over five years under MACRS.² If the software is a separate line item on the invoice, you can apply bonus depreciation to that amount on its own. Ask vendors for itemized invoices whenever you can.

How Much You Can Deduct

The rate depends on when the software is placed in service, not just when you bought it. The One, Big, Beautiful Bill Act (Public Law 119-21) permanently restored 100 percent bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.¹ A business that buys and deploys qualifying software today can write off the full purchase price this year.

Legacy Phase-Down for Older Purchases

Software acquired before January 20, 2025 is still governed by the TCJA phase-out. The deduction percentage tracks the year the software becomes operational:⁵

2023: 80 percent
2024: 60 percent
2025 (placed in service before January 20): 40 percent
2026: 20 percent
2027 and beyond: 0 percent

If you bought software before January 20, 2025 and have not deployed it, the available deduction shrinks each year you wait.

Choosing 40 Percent Instead of 100 Percent

The OBBBA gives you a one-time option to elect a 40 percent rate instead of 100 percent for qualifying property placed in service during the first tax year ending after January 19, 2025.¹ A smaller first-year deduction can be useful if you expect much higher income in later years and want to preserve deductions for then.

What Doesn’t Qualify: SaaS and Custom Software

Software-as-a-Service products, including cloud-hosted CRMs, project management tools, and online accounting platforms, are generally not eligible for bonus depreciation. You are paying for access, not acquiring a depreciable asset. Monthly and annual subscription fees are deducted as ordinary business expenses under Section 162 in the year you pay them. The same treatment applies to most cloud-based licenses where the vendor keeps the software on its servers and you access it remotely. Upfront implementation and configuration costs for a SaaS platform may need to be capitalized and amortized depending on the project stage, but the recurring subscription itself is a current operating expense.

Software developed in-house or built under contract for your specific business also falls outside bonus depreciation. Those costs are treated as research or experimental expenditures. For tax years beginning after December 31, 2024, new Section 174A lets you deduct domestic software development costs in full in the year you pay or incur them, or elect to amortize them over at least 60 months.⁶ Development performed outside the United States must still be capitalized and amortized over 15 years, starting at the midpoint of the tax year the costs are incurred. Development costs your business capitalized under the old TCJA rule during 2022 through 2024 continue amortizing on their original schedule.

Section 179 as an Alternative

Section 179 offers another route to a full first-year write-off for off-the-shelf software. For 2026, the maximum Section 179 deduction is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000. The deduction cannot exceed your business’s taxable income for the year.

Under current law both provisions usually produce the same bottom line, but they differ in ways that matter at the edges:

Section 179 cannot create or increase a net operating loss. Bonus depreciation can.⁷
Section 179 has a dollar ceiling. Bonus depreciation has no cap.
Section 179 requires an election on your return. Bonus depreciation applies automatically unless you opt out.
You can apply Section 179 first and claim bonus depreciation on any remaining cost.⁷

The distinction matters most when your total equipment spending nears the Section 179 phase-out threshold, or when you want to generate a loss to carry forward.

Recapture If You Sell the Software Later

If you claim bonus depreciation and later sell or dispose of the software at a gain, the IRS treats the previously deducted amount as Section 1245 recapture. The gain, up to the depreciation you claimed, is taxed as ordinary income rather than at capital-gains rates.⁷ Because a 100 percent write-off drops your basis to zero, any resale proceeds are typically fully recaptured. If you bought a $20,000 license, deducted the entire $20,000, and later sold it for $5,000, that $5,000 is ordinary income. The recapture does not undo the earlier tax benefit, but factor it in if you expect to resell.

How to Claim It on Your Tax Return

You report bonus depreciation on IRS Form 4562, Depreciation and Amortization. Work through it in this order:

Determine your cost basis. Start with the purchase price and add installation, setup, and sales tax.⁸
Adjust for business-use percentage. If you use the software 75 percent for business, a $10,000 package has a depreciable basis of $7,500.
Complete Part II of Form 4562. Enter the placed-in-service date, the cost allocated to business use, and the applicable bonus depreciation percentage in the Special Depreciation Allowance section.⁹
Attach Form 4562 to your primary federal return. That’s Form 1040 for sole proprietors, Form 1120 for C corporations, or the appropriate partnership or S corporation return.

Keep receipts, invoices, and records showing when the software became operational. If you claim both Section 179 and bonus depreciation on the same asset, Section 179 is applied first and bonus depreciation covers the remaining cost.

Opting Out

You can choose not to claim bonus depreciation for a given tax year. File the election as a statement attached to Form 4562 by the due date of the return, including extensions. The election applies to all qualifying property in the same class placed in service that year. You cannot opt out for one software purchase and keep it for another in the same class.⁴ Without bonus depreciation, off-the-shelf software is depreciated straight-line over 36 months.² Spreading the deduction over three years can help when you expect much higher income soon or a full write-off would create a loss you cannot use.

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
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
3
eCFR. 26 CFR 1.168(k)-2 – Additional First Year Depreciation Deduction for Property Acquired and Placed in Service After September 27, 2017
4
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
5
Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses
6
Internal Revenue Service. Revenue Procedure 2025-28
7
Internal Revenue Service. Depreciation and Recapture
8
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
9
Internal Revenue Service. Form 4562 – Depreciation and Amortization (2025)