Section 168(k) Bonus Depreciation: Qualified Property, Rates, and Recapture

Section 168(k) bonus depreciation lets a business deduct the full cost of qualifying equipment, machinery, and other assets in the year those assets are placed in service. The One Big, Beautiful Bill restored permanent 100 percent expensing, reversing a phase-down that had been on track to drop the first-year allowance to 20 percent for 2026 and to zero after that.¹ The deduction is automatic for qualifying property. If you don’t want it, you have to elect out.

What Property Qualifies

An asset qualifies if it falls within the Modified Accelerated Cost Recovery System (MACRS) and carries a recovery period of 20 years or less.² That sweeps in most tangible business property: manufacturing equipment, office furniture, tools, computers, and vehicles.

Qualified improvement property (QIP) is another major category. QIP means interior improvements to nonresidential buildings made after the building was first placed in service, including updated lighting, plumbing, fire protection and alarm systems, HVAC equipment, and interior wall reconfiguration.³ Structural expansions, elevators, escalators, and changes to the building’s internal framework don’t qualify. QIP has a 15-year MACRS life, so it sits well under the 20-year ceiling.

Off-the-shelf computer software qualifies if it meets three tests: it must be readily available for purchase by the general public, licensed on a nonexclusive basis, and not substantially modified for the buyer. Software meeting all three is depreciated over 36 months rather than amortized as an intangible under Section 197.⁴ Custom-built software, or software acquired as part of buying a business, is a Section 197 intangible and doesn’t qualify.

Certain fruit- and nut-bearing trees, vines, and other plants that produce more than one crop or yield are eligible under Section 168(k)(5). Agricultural businesses can take the deduction in the year the plant is planted or grafted, rather than waiting until it becomes productive.

Used Property Now Counts

Before the Tax Cuts and Jobs Act, only new assets qualified. The TCJA opened bonus depreciation to used property as long as the asset is new to the taxpayer.⁵ You can buy a five-year-old machine on the secondary market and still claim full bonus depreciation, provided neither you nor a predecessor previously used that specific asset.

The transaction must be at arm’s length. Property acquired from a related party doesn’t qualify. Related parties for this purpose are defined by Sections 267(b) and 707(b), which cover family members, commonly controlled businesses, and partnerships where one partner holds a significant interest.⁶ Property received through certain tax-free exchanges or involuntary conversions is also excluded. The rules exist to prevent reshuffling assets between connected parties from generating a full deduction.

The Rate History

The TCJA set bonus depreciation at 100 percent for property placed in service after September 27, 2017, then built in a phase-down: 80 percent for 2023, 60 percent for 2024, 40 percent for 2025, 20 percent for 2026, and zero from 2027.⁷

The One Big, Beautiful Bill restored permanent 100 percent bonus depreciation for qualified property.¹ For assets placed in service in 2026 and beyond, the full cost is deductible in year one. If you placed assets in service during the reduced-rate years and took 80, 60, or 40 percent, it’s worth checking whether amended returns can pick up the additional deduction.

Vehicles and the 6,000-Pound Line

Vehicles are where bonus depreciation runs into a separate set of dollar caps. Section 280F imposes annual depreciation limits on passenger automobiles, defined as four-wheeled vehicles rated at 6,000 pounds unloaded gross vehicle weight or less.⁸ Even with 100 percent bonus depreciation available, first-year depreciation on a qualifying passenger car placed in service in 2026 can’t exceed $20,300. Without bonus depreciation, the first-year cap drops to $12,300.⁹

Heavy SUVs, trucks, and vans rated above 6,000 pounds but not more than 14,000 pounds gross vehicle weight escape the Section 280F caps entirely.⁸ A qualifying heavy vehicle used 100 percent for business can be fully expensed under Section 168(k) with no dollar ceiling. That’s why the 6,000-pound threshold drives so much year-end planning.

Listed Property and the 50 Percent Business-Use Test

Some assets that meet the MACRS test still face an extra hurdle. Listed property includes items commonly used for both personal and business purposes, such as vehicles, cameras, and sound equipment. To claim bonus depreciation on listed property, business use has to exceed 50 percent in the year the asset is placed in service.¹⁰

If business use falls to 50 percent or below, the asset must be depreciated under the Alternative Depreciation System using straight-line, and neither bonus depreciation nor Section 179 is available. For vehicles, a contemporaneous mileage log is the only reliable way to defend the deduction in an audit.

Property That Doesn’t Qualify

Section 168(k)(9) carves out two categories that can’t claim bonus depreciation regardless of recovery period. Property used in a regulated public utility trade or business is excluded. That covers electricity, water, sewage disposal, gas, and steam distributed through local distribution systems.¹¹ Businesses with floor plan financing indebtedness, most commonly auto dealerships, also face restrictions. Dealers whose total business interest expense stays below the statutory cap on deductible interest remain eligible.

Property required to use the Alternative Depreciation System under any other provision is also barred. That includes property used predominantly outside the United States and tax-exempt use property.¹¹ Real property trades or businesses that elect out of the Section 163(j) business interest expense limitation must depreciate their nonresidential real property, residential rental property, and qualified improvement property under ADS. The election gives them an unrestricted interest deduction but forfeits bonus depreciation on those asset classes.¹² Farming businesses that make a similar election lose bonus depreciation on property with a recovery period of 10 years or more.

Electing Out

Bonus depreciation is the default. Every qualifying asset receives it automatically unless you affirmatively opt out. The election is made per class of property, not per asset, so you can’t pick and choose which machines in the same MACRS class get the deduction. The election is made by attaching a statement to a timely filed federal return, including extensions.

Why would a business turn down a full first-year write-off? The most common reason is preserving deductions for future years when the business expects to be in a higher tax bracket. A startup running losses may prefer to spread depreciation rather than pile onto an existing net operating loss. Some businesses elect out to match income and expense more closely for financial reporting, or to avoid recapture headaches on assets they plan to sell within a few years. Once made, the election is generally irrevocable without IRS consent.

Recapture When You Sell

The upfront savings come with a tail. When you sell or otherwise dispose of an asset that received bonus depreciation, any gain up to the total depreciation previously claimed is recaptured as ordinary income under Section 1245.¹³ Recapture is taxed at ordinary rates, not capital gains rates.

Say a business buys equipment for $200,000 and writes off the full amount through bonus depreciation, driving adjusted basis to zero. If the business later sells the equipment for $80,000, the entire $80,000 is ordinary income. The benefit was real in year one, but the sale claws part of it back. The math bites harder with bonus depreciation because the full cost was expensed up front, so any sale price above zero produces recapture.

State Tax Conformity

Federal and state returns don’t always agree on bonus depreciation. Roughly 30 states and local jurisdictions decouple from the federal rules, so they don’t allow the deduction in computing state taxable income. In those states, you add back some or all of the federal deduction on the state return and then claim regular depreciation over the asset’s recovery period at the state level.

This is a timing difference, not a permanent tax hit. Total depreciation claimed at the state level eventually equals what was claimed federally; the deductions just land in different years. Businesses operating in multiple states have to track depreciation schedules separately for federal and each state. Checking your state’s conformity should be one of the first steps in any capital expenditure analysis.

How to Claim It on Your Return

Bonus depreciation is reported on Form 4562. Part II is designated for the special depreciation allowance on qualified property.¹⁴ The form asks for a description of the property, the date placed in service, the cost basis, and the applicable percentage.

Cost basis includes more than the purchase price. Shipping, delivery, sales tax, installation, and testing fees are part of the depreciable basis. The placed-in-service date is the date the asset is ready and available for its intended use, which may differ from the purchase or delivery date. Getting that date right decides which tax year carries the deduction.

Form 4562 attaches to the income tax return. Sole proprietors and single-member LLCs file it with Schedule C on Form 1040. Corporations attach it to Form 1120.¹⁴ If you find an error after filing, Form 1040-X corrects individual returns and Form 1120-X corrects corporate returns.¹⁵ Keep purchase receipts, financing documents, delivery confirmations, and placed-in-service records for at least as long as the asset sits on your depreciation schedule plus three years. Those records are the first thing an examiner asks for, and documentation gaps are where most bonus depreciation disputes start.

Section 179 vs. Bonus Depreciation

Both Section 179 and Section 168(k) let you write off asset costs in year one, but they work differently. Bonus depreciation is automatic, has no dollar cap, applies to the full cost of every qualifying asset, and can create or increase a net operating loss. Section 179 requires an affirmative election, has an annual dollar limit, and can’t reduce taxable income below zero.⁴

For most businesses buying moderate amounts of equipment, the practical result is similar. The difference shows up at the extremes. A business spending heavily on capital assets benefits from bonus depreciation’s lack of a cap. A business with little or no taxable income benefits from bonus depreciation’s ability to generate a carryforward loss. Section 179 is more useful when you want to expense a specific asset selectively, because Section 179 can be elected asset by asset while the bonus depreciation election out sweeps in the entire MACRS class.

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
eCFR. 26 CFR 1.168(k)-1 – Additional First Year Depreciation Deduction
3
Internal Revenue Service. Topic No. 704, Depreciation
4
Internal Revenue Service. Publication 946, How To Depreciate Property
5
Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses
6
eCFR. 26 CFR 1.168(k)-1 – Additional First Year Depreciation Deduction
7
Internal Revenue Service. 2023 Instructions for Form 4562
8
Internal Revenue Service. Instructions for Form 4562 (2025)
9
Internal Revenue Service. Revenue Procedure 2026-15
10
Internal Revenue Service. Publication 587, Business Use of Your Home
11
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
12
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
13
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
14
Internal Revenue Service. Instructions for Form 4562
15
Internal Revenue Service. Instructions for Form 1040-X