What Property Qualifies for Bonus Depreciation?

Bonus depreciation lets a business deduct the full cost of most qualifying property in the year it’s placed in service, and the question of what property qualifies for bonus depreciation comes down to a short list of tests. The property has to be tangible, have a MACRS recovery period of 20 years or less, be used more than half the time for business, and be acquired from an unrelated party in a transaction that counts as the taxpayer’s first use. Interior improvements to commercial buildings, off-the-shelf software, certain film and theatrical productions, and a new category for domestic manufacturing facilities also qualify under their own rules. As of 2026, the One Big Beautiful Bill Act has permanently restored the deduction to 100% of an asset’s cost for property acquired after January 19, 2025.¹

The Core Test: Tangible Property With a 20-Year Recovery Period or Less

The broadest category of qualifying property is any tangible asset depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less.² MACRS sorts assets into classes based on expected useful life, and everything from the three-year class through the 20-year class is eligible. That sweeps in the vast majority of business equipment.

Some common examples by recovery period:

Five-year property: computers, copiers, cars, light trucks, semiconductor manufacturing equipment, and most farming machinery where the original use begins with the taxpayer.
Seven-year property: office furniture, desks, filing cabinets, general-purpose manufacturing equipment, and railroad track.
Ten-year property: single-purpose agricultural structures, fruit-bearing trees and vines, and certain vessels.
Fifteen-year property: land improvements like sidewalks, fences, and parking lots, along with qualified improvement property.
Twenty-year property: farm buildings and certain municipal sewers placed in service after 2017.

The cutoff is strict. Nonresidential commercial buildings have a 39-year recovery period, and residential rental buildings have a 27.5-year period, so neither qualifies on its own.³ The building shell sits outside the window. Interior improvements to commercial buildings can qualify separately under the QIP rules below.

Vehicles and Other Listed Property

Business vehicles qualify, but passenger cars run into a dollar cap that can swallow most of the deduction. Under Section 280F, a passenger automobile is any four-wheeled vehicle manufactured primarily for use on public roads and rated at 6,000 pounds gross vehicle weight or less.⁴ For these vehicles placed in service in 2026, the first-year deduction (bonus depreciation included) is capped at $20,300. Later-year caps are $19,800, $11,900, and $7,160.

Heavy SUVs, pickups, and vans over 6,000 pounds gross vehicle weight fall outside those caps, which is why they draw so much attention in year-end planning. A qualifying heavy vehicle can absorb the full 100% deduction in year one with no dollar limit beyond its actual cost. Ambulances, hearses, and vehicles used directly in a transportation-for-hire business are also exempt from the caps.⁴

Vehicles are also “listed property,” a category covering transportation equipment and property generally used for entertainment. Listed property has to be used more than 50% for qualified business purposes to be eligible for bonus depreciation.³ If business use is 50% or less in the year the asset goes into service, bonus depreciation is off the table entirely. If business use drops below 50% in a later year, some of the deduction may have to be recaptured. A mileage log or usage record protects the deduction.

Qualified Improvement Property

Interior work on commercial buildings is one of the most valuable categories. Qualified improvement property (QIP) is any improvement a taxpayer makes to the interior of a nonresidential building, as long as the improvement is placed in service after the building itself was first put into use.³ New flooring, updated lighting, interior walls, electrical work, plumbing upgrades, and similar renovations all count.

Three types of work are specifically excluded from QIP:

Enlargement of the building. Adding square footage is not an interior improvement.
Elevators and escalators. Installation or replacement of either is carved out.
Internal structural framework. Changes to load-bearing walls, columns, or the building’s structural skeleton do not qualify.

QIP has a 15-year MACRS recovery period, which keeps it under the 20-year threshold.² That wasn’t always the case. A drafting error in the 2017 Tax Cuts and Jobs Act left QIP stuck at 39 years, effectively disqualifying it. The CARES Act in 2020 retroactively fixed the mistake. Businesses that missed the correction for earlier tax years may be able to file amended returns or use a change-in-accounting-method procedure to recover the deduction.

Software, Productions, and Other Eligible Categories

Several less obvious categories also qualify under Section 168(k).²

Off-the-shelf computer software. Software qualifies if it is commercially available to the general public under a nonexclusive license and has not been substantially modified.³ Standard operating systems, accounting packages, productivity suites, and design tools fit. Custom-developed software follows a different path: internally built software is typically amortized over 36 months, and software acquired as part of purchasing another business may be classified as a Section 197 intangible with a 15-year amortization period, which disqualifies it from bonus depreciation.

Film, television, and live theatrical productions. Qualifying productions where a significant portion of compensation is for services performed in the United States are eligible.³

Water utility property. Assets used in the collection, treatment, and distribution of water are specifically listed as qualifying property.³

Qualified production property. The One Big Beautiful Bill Act created a new category under Section 168(n) for certain nonresidential real property used in the manufacturing, production, or refining of tangible goods within the United States. The facility must begin construction after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031.⁵ Office space and administrative areas inside these facilities do not qualify, and food service establishments where meals are prepared and sold on-site are excluded.

New and Used Property Both Count, But Prior Use and Relationships Don’t

Before the Tax Cuts and Jobs Act, only brand-new property was eligible. That restriction is gone. New and used property both qualify as long as the acquisition meets a set of conditions.⁶ The most important ones:

First-time use by the taxpayer. You (or any predecessor) cannot have used the property at any point before acquiring it. Selling an asset and buying it back does not reset the clock.
No related-party purchases. The property cannot come from a related party, such as a family member, or from a member of the same controlled group. For corporate transactions, a shareholder owning more than 50% of the stock is a related party.
Not acquired in a carryover-basis transaction. Gifts and inherited property, where the tax basis carries over from the prior owner, do not count as a qualifying purchase.

The related-party rule catches people off guard. A parent corporation sells equipment to a subsidiary, and the subsidiary cannot claim bonus depreciation because both entities are in the same controlled group. The same logic applies to sales between spouses or between entities with overlapping ownership.⁶

Property That Does Not Qualify

Several categories are excluded even when they’d otherwise meet the recovery-period test.

Property under the Alternative Depreciation System (ADS). If an asset must use ADS rather than standard MACRS, it does not qualify for bonus depreciation.² This most often comes up through a voluntary election. Real property trades and businesses that elect out of the Section 163(j) interest deduction limitation must depreciate their real property under ADS, and that property loses eligibility.⁷ Farming businesses making the same election lose bonus depreciation on any property with a recovery period of 10 years or more.

The buildings themselves. Nonresidential real property at 39 years and residential rental property at 27.5 years both exceed the 20-year threshold. Only interior improvements to nonresidential buildings qualify, and only if they meet the QIP rules.

Property placed in service and disposed of in the same year. Buy equipment and sell or scrap it before year-end, and it does not qualify.⁵

Certain intangibles and term interests. Goodwill, going-concern value, and other Section 197 intangibles follow their own 15-year amortization rules and are not eligible.

Placed in Service, Not Just Purchased

Buying the asset is not enough. Bonus depreciation is claimed for the tax year the property is placed in service, meaning the date it is ready and available for its intended use in the business.⁵ Equipment sitting in a warehouse still in its crate has not been placed in service. A manufacturing line delivered in December but not installed and operational until January belongs to the following tax year.

This trips up businesses at year-end. If the deduction is needed on this year’s return, the asset has to be up and running before December 31. Documentation showing when installation was completed and when the asset first performed its intended function is worth keeping for an audit.

Timing on the 100% Rate

The 100% rate applies to qualified property acquired after January 19, 2025, and there is no sunset date on it.¹ Property acquired before January 20, 2025, and placed in service during 2026 still runs on the old phase-down schedule, which limits the first-year bonus deduction to 20% of cost. Property acquired before January 20, 2025, and placed in service after 2026 gets no bonus depreciation at all. Most 2026 purchases will fall on the new-rate side of the cutoff, but businesses sitting on equipment bought in 2024 or earlier need to check acquisition dates.⁵

State Rules May Not Follow Federal

Federal bonus depreciation does not automatically flow through to a state return. A significant number of states decouple from the federal rules entirely or cap the state-level deduction at a lower percentage. In those states, part or all of the federal bonus depreciation has to be added back when calculating state taxable income, with regular depreciation claimed over the asset’s full recovery period on the state side. Confirm your state’s conformity status before assuming a federal write-off produces an equal state-level benefit.

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
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Publication 946, How To Depreciate Property
4
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles
5
Internal Revenue Service. Topic No. 704, Depreciation
6
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
7
Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense