What Is Special Depreciation Allowance: Form 4562 and Vehicles

The special depreciation allowance, commonly called bonus depreciation, lets a business deduct the full cost of qualifying equipment, machinery, software, and certain building improvements in the year the asset is placed in service, instead of spreading that deduction over the property’s normal recovery period. The One Big Beautiful Bill Act, signed July 4, 2025, permanently set the allowance at 100% for qualified property acquired and placed in service after January 19, 2025.¹ You claim it on Form 4562 with your annual return, and it’s calculated after any Section 179 expense and before regular MACRS depreciation.²

What Property Qualifies

To qualify under Internal Revenue Code Section 168(k), an asset must be tangible property with a MACRS recovery period of 20 years or less. That range covers most of what a business actually buys: office furniture, computer equipment, specialized manufacturing machinery, and similar assets. Off-the-shelf computer software qualifies too, as long as it’s commercially available and licensed on a non-exclusive basis.³

Qualified improvement property also counts. These are interior upgrades to nonresidential buildings, including new flooring, lighting, and HVAC work. With the allowance now permanently at 100%, a business renovating leased or owned commercial space can fully deduct those improvements the year they’re completed.

Used Property Qualifies If It’s New to You

Bonus depreciation is no longer limited to brand-new assets. A used piece of equipment gets the same 100% deduction as a new one, provided it’s new to your business.⁴ Five conditions apply:

You cannot have used the property at any time before acquiring it.
The seller cannot be a related party under Section 267(b) or 707(b).
Your basis cannot be determined by reference to the seller’s adjusted basis.
The basis cannot come from a decedent’s estate.
The cost cannot include the basis of other property you already hold.

These rules prevent shuffling assets between related entities to generate fresh deductions on property a business effectively already owned.

Business-Use Threshold

The asset has to be used more than 50% for business purposes in the year it’s placed in service. If business use later drops below that line, depreciation recapture kicks in: you have to pay back the difference between what you deducted and what the slower alternative depreciation system would have allowed.³ This is where people get burned. You buy a truck, deduct the full cost, drift into using it mostly for personal errands a couple of years later, and the IRS wants money back.

The property also generally must be placed in service inside the United States. Assets used predominantly abroad fall under the alternative depreciation system and don’t qualify.

Special Rules for Business Vehicles

Passenger automobiles are capped by Section 280F regardless of what bonus depreciation would otherwise allow. For a passenger auto placed in service in 2026:⁵

First year with bonus depreciation: $20,300
First year without bonus depreciation: $12,300
Second year: $19,800
Third year: $11,900
Each succeeding year: $7,160

A $55,000 sedan placed in service in 2026 is capped at a $20,300 first-year deduction, with the remaining cost spread across later years subject to those same annual limits.

Vehicles with a gross vehicle weight rating above 6,000 pounds aren’t classified as passenger automobiles under Section 280F, so the annual caps don’t apply. A qualifying heavy pickup, full-size SUV, or cargo van can be fully expensed in year one. The Section 179 deduction for SUVs rated between 6,001 and 14,000 pounds is capped at $32,000 for 2026, but bonus depreciation has no such cap, which makes a modest Section 179 claim plus 100% bonus depreciation on the rest particularly effective for heavy vehicles. The 50% business-use threshold still applies, so keep mileage logs.

Bonus Depreciation and Section 179 on the Same Purchase

Most businesses can use both provisions on the same asset, and the IRS specifies the order: Section 179 first, then bonus depreciation on the remaining basis, then regular MACRS on anything left over.⁶ The two differ in ways worth knowing before you file.

Section 179 has a dollar cap. For 2026, the maximum is $2,560,000, phasing out dollar-for-dollar once qualifying purchases exceed $4,090,000 and disappearing entirely at $6,650,000. Bonus depreciation has no cap: a company spending $10 million on equipment can still deduct all of it. Section 179 can only reduce taxable income to zero, while bonus depreciation can create or increase a net operating loss you carry forward. And Section 179 lets you pick specific assets and specific dollar amounts, while bonus depreciation applies to a whole class of property unless you elect out of that entire class.

How to Claim the Deduction on Form 4562

You report the allowance on Form 4562, Depreciation and Amortization, filed with your annual income tax return. Part II is the section for the special depreciation allowance. For each qualifying asset, enter the cost basis, the property class, and the date placed in service.⁶ The form multiplies the depreciable basis (after any Section 179 deduction) by the applicable percentage, currently 100%.

Electing Out

You can elect out of bonus depreciation for any class of property by attaching a statement to a timely filed return, including extensions. The election covers all qualified property in that class placed in service during the year; you cannot cherry-pick individual assets within a class, and once made the election generally cannot be revoked without IRS consent.⁷ A separate transitional election under Section 168(k)(10) lets taxpayers whose first tax year ends after January 19, 2025, take only 40% bonus depreciation (60% for certain long-production-period property and aircraft) on qualifying property placed in service during that year.⁶

Reasons to elect out: you expect significantly higher income next year and want to save deductions for then, you want to avoid creating a net operating loss, or you operate in a state that decouples from federal bonus depreciation and want to simplify state reporting.

Skipping the deduction by accident is a different problem. Under the “allowed or allowable” rule, the IRS treats you as having claimed the maximum depreciation you were entitled to, whether or not you actually claimed it. Failing to take bonus depreciation when eligible, without a proper election out, can permanently reduce your basis in the asset without giving you the tax benefit.⁴

Contracts Signed Before January 20, 2025

The acquisition date, not the placed-in-service date, controls which rate applies. Property acquired under a binding contract signed before January 20, 2025, still falls under the pre-OBBBA phase-down. Equipment locked in by contract in December 2024 but delivered in 2026 qualifies for only 20% bonus depreciation, not 100%.¹

State Tax Conformity

Your federal return and your state return may not agree. A significant number of states decouple from Section 168(k) and require you to add back some or all of the federal bonus depreciation when calculating state taxable income. Rules vary widely. Delaware decoupled from Section 168(k) for S corporations and partnerships starting in 2026, and Michigan limits bonus depreciation to 20% for 2026 regardless of the federal rate. Most decoupling states let you subtract the added-back amount over several later years, so the full deduction still comes through eventually, just more slowly. The practical effect is a timing difference that can produce an unexpected state tax bill in the year of purchase. Check your state’s conformity before assuming the federal deduction flows through.

Errors That Trigger Penalties

Getting bonus depreciation wrong can cost more than the disallowed deduction. If you overstate depreciation and underpay tax, Section 6662 authorizes an accuracy-related penalty of 20% of the underpayment when the shortfall results from negligence, disregard of the rules, or a substantial understatement of income tax (generally more than the greater of 10% of the tax owed or $5,000).⁸ Intentional fraud triggers a steeper penalty under Section 6663 and can carry criminal consequences.

The most common mistakes: claiming the allowance on property that doesn’t qualify (wrong recovery period, personal use above 50%, or a related-party purchase that fails the used-property rules), miscalculating the depreciable basis, and failing to properly elect out when you meant to. Keep clean records of acquisition dates, purchase prices, and business-use percentages. That documentation is the simplest defense if the return is questioned.⁹

1
Internal Revenue Service. IRS Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction
2
Internal Revenue Service. Topic No. 704, Depreciation
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
5
Internal Revenue Service. Rev. Proc. 2026-15
6
Internal Revenue Service. Instructions for Form 4562
7
Internal Revenue Service. IRS, Treasury Issue Guidance on Making or Revoking the Bonus Depreciation Elections
8
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
9
eCFR. 26 CFR 1.6662-2 – Accuracy-Related Penalty