Section 168(k) Bonus Depreciation Under the OBBBA: Caps and Recapture

For business assets placed in service in 2026, bonus depreciation under Section 168(k) lets you deduct 100% of the cost in the first year. The One Big Beautiful Bill Act, signed in 2025, made the full rate permanent for qualified property acquired after January 19, 2025, and removed the prior expiration date entirely.¹ A machine, vehicle, software license, or building improvement that would otherwise depreciate over years can be written off immediately in 2026, provided it meets the eligibility rules.

What Property Qualifies in 2026

The widest category of eligible property is tangible business property depreciated under MACRS with a recovery period of 20 years or less.² That captures most of what a business actually buys: machinery, computers, office furniture, manufacturing equipment, and land improvements like parking lots and fencing.

Several other specific categories qualify:³

Off-the-shelf computer software available to the general public, depreciable over 36 months.
Water utility property used in collection and distribution.
Film, television, and live theatrical productions whose costs would have been deductible under Section 181.
Qualified sound recording productions, a category the OBBBA added in 2025.

Qualified Improvement Property also qualifies. QIP is any improvement to the interior of a nonresidential building made after the building was first placed in service, and it carries a 15-year recovery period that keeps it inside the 20-year window.² Interior HVAC upgrades, fire protection, security systems, and roof replacements on existing nonresidential buildings all count.

The asset must be used more than 50% for business. Property used by certain regulated utilities is excluded, as is real property held by a real property trade or business that has elected out of the Section 163(j) interest limitation. That election is generally irrevocable and strips QIP, nonresidential real property, and residential rental property of bonus eligibility in exchange for a larger interest deduction.⁴ Model it carefully before you file.

When an Asset Is Placed in Service

The 2026 deduction attaches to the year an asset is placed in service, not the year you paid for it. Under IRS rules, property is placed in service when it is in a condition of readiness and availability for its assigned function. A machine sitting crated in a warehouse is not placed in service; the same machine installed and operational is, even if production hasn’t ramped up.

Year-end timing matters. Equipment delivered and installed in late December 2026 is a 2026 asset even if it runs its first job in January. Equipment purchased in December 2026 but not installed until February 2027 is a 2027 asset, and you won’t get a 2026 deduction for it.

Used Property and Related-Party Limits

Used assets qualify, but with two conditions. You cannot have previously used the asset yourself, and you cannot acquire it from a related party.⁵ Related parties include spouses, parents, grandparents, children, and grandchildren, plus commonly controlled business entities such as a corporation and its majority shareholder or two companies owned by the same person.

Buying used equipment from an unrelated seller on the open market is fine. Buying your father’s old forklift is not eligible for the bonus allowance, no matter the price.

Vehicle Caps for 2026

Cars, trucks, and SUVs qualify, but passenger automobiles run into the Section 280F dollar caps that override percentage-based depreciation. For passenger autos placed in service in 2026, the first-year limit is $20,300 with bonus depreciation and $12,300 without it. A $60,000 sedan does not generate a $60,000 first-year deduction.

The 280F caps apply only to vehicles rated at 6,000 pounds gross vehicle weight or less. Vehicles rated above 6,000 pounds but at or under 14,000 pounds (most large SUVs and pickups) escape the passenger auto limits and can be fully bonus-depreciated, though the Section 179 portion of their deduction is capped at $32,000 for 2026. Vehicles over 14,000 pounds, such as commercial trucks and large vans, face no caps under either provision.

Business use must exceed 50% in the first year and every year afterward. If it drops below that line later, you’ll owe back part of the deduction as recaptured ordinary income.

How to Calculate and Claim the Deduction

The arithmetic under the 100% rate is simple. Multiply the asset’s cost basis by 100%. A $150,000 piece of equipment bought and placed in service in 2026 produces a $150,000 bonus depreciation deduction, with no basis left to carry into future years.

If you also use Section 179, apply it first, then bonus depreciation to whatever remains.² Expense $50,000 of that $150,000 machine under Section 179, apply 100% bonus to the remaining $100,000, and the full purchase price comes off in year one.⁶

For 2026, the Section 179 limit is $2,560,000, phasing out when total equipment purchases exceed $4,090,000. The key difference between the two provisions: Section 179 cannot create or increase a net operating loss, but bonus depreciation can. If your business has $200,000 of taxable income before depreciation, Section 179 maxes out at $200,000. Bonus depreciation has no such ceiling, which makes it especially valuable for startups and loss-year businesses.³

Report the deduction on IRS Form 4562, Depreciation and Amortization, filed with your annual return. The bonus allowance goes on Part II, Line 14.⁷ Keep documentation of each asset’s cost, acquisition date, and placed-in-service date. If the IRS questions the deduction, substantiation is your burden.

Electing Out

You can decline the bonus allowance for any class of property. The election applies to every asset in that class placed in service that year, not to individual items. The usual reason to elect out is an expectation that taxable income will be much higher in later years, when the deductions would be worth more per dollar. The election is made by attaching a statement to a timely filed return and is generally irrevocable.

Recapture When Business Use Drops or You Sell

The 50% business-use test is not one and done. If business use drops to 50% or below in any later year of the recovery period, you must recapture the excess depreciation as ordinary income in that year.² The recapture equals the difference between the bonus depreciation actually claimed and the straight-line depreciation that would have applied under the Alternative Depreciation System. For a $50,000 asset fully expensed in year one, a drop to 40% business use in year three can trigger a recapture of tens of thousands of dollars. Log the business-use percentage for every asset, every year, through the full MACRS recovery period.

Selling a bonus-depreciated asset creates its own tax event. Full expensing drops the asset’s basis to zero, so any sale price above zero is gain. Under Section 1245, that gain is recaptured as ordinary income up to the amount of depreciation claimed, taxed at your regular rate rather than at capital gains rates.⁸ Buy a $100,000 machine in 2026, expense the full amount, sell it three years later for $35,000, and the entire $35,000 is ordinary income. Sell it for $110,000 and the first $100,000 is ordinary recapture while the remaining $10,000 is a Section 1231 gain eligible for capital gains treatment.

Report recapture on Form 4797, Sales of Business Property, using Part III for the Section 1245 calculation. The ordinary income flows from Line 25b of Part III to Line 13 of Part II. Recapture rarely argues against taking the deduction, because the time value of money generally wins, but if you turn over equipment every year or two, build the recapture into your projections.

State Tax Conformity

Federal bonus depreciation does not automatically flow through to your state return. Several states decouple from Section 168(k) and require an add-back of some or all of the federal deduction. As of early 2026, states that have decoupled or limited the deduction include California, Delaware, Illinois, Michigan, Pennsylvania, and the District of Columbia, among others. Many of them let you depreciate the asset over its normal MACRS life for state purposes, so you eventually recover the same total deduction over many years rather than one.

The practical effect is a timing mismatch. Your federal return can show a $500,000 bonus deduction and a loss while your state return still shows meaningful taxable income. If you operate in multiple states, each with its own conformity rules, the tracking work multiplies. Check your state’s position before you assume the federal deduction flows through cleanly.

1
Internal Revenue Service. Notice 2026-11: Interim Guidance on Additional First Year Depreciation Deduction
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Office of the Law Revision Counsel. 26 USC 168 Accelerated Cost Recovery System
4
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
5
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
6
Internal Revenue Service. Instructions for Form 4562 (2025) Depreciation and Amortization
7
Internal Revenue Service. Form 4562 – Depreciation and Amortization
8
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property