How bonus depreciation works in 2026 under the OBBBA

Bonus depreciation 2026 has changed. The One Big Beautiful Bill Act restored 100% bonus depreciation for qualified property placed in service after January 20, 2025, reversing the phase-down that had reduced the deduction to 60% for 2024 and would have dropped it to 40% for 2025 under prior law. This means businesses can once again deduct the full cost of eligible assets in the year they are purchased and placed in service, without spreading the deduction over five, seven, or fifteen years.

This article explains how the business asset deduction 2026 rules work under the OBBBA, which assets qualify, how Section 179 vs bonus depreciation compare, and how S Corporations, C Corporations, and Partnerships can use these deductions to reduce taxable income immediately.

What the OBBBA changed for bonus depreciation

Before the OBBBA, bonus depreciation was on a declining schedule set by the Tax Cuts and Jobs Act of 2017. The TCJA allowed 100% bonus depreciation for assets placed in service between September 27, 2017, and December 31, 2022. After that, the percentage dropped by 20 points each year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027.

The OBBBA reversed this phasedown retroactively. Under the new law, 100% bonus depreciation applies to qualified property placed in service after January 20, 2025. The IRS issued guidance on the retroactive application, and businesses that filed 2024 or early 2025 returns using the reduced percentages can file amended returns to claim the full 100% deduction. Publication 946, How To Depreciate Property, provides the current rules governing the Depreciation and amortization deduction.

Key changes under the OBBBA:

• 100% first-year deduction restored for qualified property placed in service after January 20, 2025
• Applies to both new and used property as long as it is new to the taxpayer
• No dollar cap on the deduction amount, unlike Section 179
• Available to businesses of all sizes without a phase-out based on total asset purchases

Which assets qualify for 100% bonus depreciation

Bonus depreciation applies to tangible personal property with a MACRS recovery period of 20 years or less. It also applies to certain computer software and qualified improvement properties. The asset must be placed in service during the tax year, purchased, and ready for use, not just ordered.

Qualifying assets include:

1. Office furniture, desks, chairs, and fixtures with a 7-year recovery period
2. Computers, servers, and technology equipment with a 5-year recovery period
3. Vehicles used for business with a gross vehicle weight rating over 6,000 pounds
4. Manufacturing equipment and machinery
5. Qualified improvement property, meaning interior improvements to nonresidential buildings, with a 15-year recovery period

Assets that do not qualify include land, buildings (the structure itself), inventory, and property used outside the United States. Real property with a recovery period longer than 20 years, like residential rental buildings with a 27.5-year recovery period, is not eligible.

Business owners in Texas and Florida often use bonus depreciation aggressively because the deduction reduces federal taxable income without a corresponding state income tax offset, making the federal savings the entire benefit.

Section 179 vs bonus depreciation in 2026

Section 179 and bonus depreciation both allow first-year expensing of business assets, but they operate under different rules. Understanding Section 179 vs bonus depreciation helps you choose the right tool for each purchase.

Section 179 key features for 2026:

• Maximum deduction of $1,250,000 per year (estimated, subject to IRS inflation adjustment)
• Phase-out begins when total asset purchases exceed $3,130,000
• Cannot create or increase a net operating loss; deduction is limited to taxable income
• Applies to both new and used property
• Elected asset by asset; you choose which assets to expense under Section 179

Bonus depreciation key features for 2026:

1. No dollar cap on the total deduction
2. No phase-out based on total purchases
3. Can create or increase a net operating loss; excess deduction carries forward
4. Applies automatically to all eligible assets unless the taxpayer elects out

The practical difference matters most for large asset purchases. If a business buys $2,000,000 in equipment, Section 179 caps the deduction at $1,250,000. Bonus depreciation allows the full $2,000,000 deduction with no cap. If the business has a loss year, Section 179 cannot increase the loss, but bonus depreciation can, creating a net operating loss that carries forward to offset future income.

For S Corporations and Partnerships, this distinction is especially meaningful because excess deductions flow through to Individual owners and reduce their personal taxable income in the year the loss is allocated.

How to claim bonus depreciation on your return

Bonus depreciation is claimed on IRS Form 4562, Depreciation and Amortization. The form is filed with the business tax return: Form 1120-S for S Corporations, Form 1120 for C Corporations, or Form 1065 for Partnerships.

Steps to claim the deduction:

1. List each qualifying asset on Part I (Election to Expense) or Part II (Special Depreciation Allowance) of Form 4562
2. Enter the full cost basis of each asset as the special depreciation allowance if claiming 100% bonus depreciation
3. Carry the total to the appropriate line of the business return
4. For pass-through entities, the deduction flows through to owners on Schedule K-1

If you placed qualifying assets in service during 2024 and filed your return using the 60% rate, you can file an amended return to claim the additional 40% now that the OBBBA has restored 100%. The deadline to amend depends on when the original return was filed, but the standard window is three years from the filing date.

Business owners in California should note that California does not conform to federal bonus depreciation. Assets expensed under bonus depreciation on the federal return must be depreciated over their normal recovery period on the California return, creating a state-federal difference that requires tracking.

Vehicle depreciation under the OBBBA rules

Business vehicles are one of the most common bonus depreciation targets. The rules depend on the vehicle's gross vehicle weight rating and whether it is classified as a passenger automobile or a heavy SUV or truck.

For passenger automobiles (GVWR under 6,000 pounds), the first-year depreciation limit is capped at approximately $20,400 for 2026 when bonus depreciation is claimed. This includes regular MACRS depreciation and bonus depreciation, both of which are subject to the luxury auto limits under IRC Section 280F. Publication 463, Travel, Gift, and Car Expenses, outlines these limits in detail.

For heavy vehicles (GVWR over 6,000 pounds), there is no luxury auto cap. A business that purchases a $75,000 SUV with a GVWR over 6,000 pounds and uses it 100% for business can deduct the full $75,000 in year one under bonus depreciation. This is the well-known Section 179 SUV strategy combined with bonus depreciation. The Vehicle expenses strategy covers both approaches and helps determine which method produces the larger deduction for your specific purchase.

The vehicle must be used more than 50% for business to qualify for bonus depreciation. If business use drops below 50% in a subsequent year, the excess depreciation is recaptured as ordinary income.

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Frequently asked questions

Q: Can I use bonus depreciation on used equipment in 2026?

A: Yes. Under both the TCJA and OBBBA rules, bonus depreciation applies to used property as long as it is new to the taxpayer. You cannot have used the asset before acquiring it, and it cannot be acquired from a related party.

Q: Is bonus depreciation available for rental property?

A: The building structure itself does not qualify because residential rental property has a 27.5-year recovery period. However, components within the rental property, such as appliances, carpeting, and certain fixtures with shorter recovery periods, can qualify for bonus depreciation.

Q: What is the difference between bonus depreciation and Section 179 for a vehicle?

A: Both allow a first-year deduction of a business vehicle's cost. Section 179 has an overall cap of $1,250,000 and cannot create a loss. Bonus depreciation has no dollar cap and can create a net operating loss. For heavy vehicles with a GVWR over 6,000 pounds, both methods allow full expense with no luxury auto limits.

Q: Does the OBBBA bonus depreciation apply retroactively to 2024 assets?

A: The OBBBA restored 100% bonus depreciation for property placed in service after January 20, 2025. For 2024 assets, the 60% rate applied. However, some OBBBA provisions allow retroactive claims for certain property, and businesses should review IRS guidance for their specific situation.

Q: Can a sole proprietor claim bonus depreciation?

A: Yes. Sole proprietors report bonus depreciation on Form 4562 filed with Schedule C. The deduction reduces self-employment income, which lowers both income tax and self-employment tax.