The bonus depreciation rules introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 represent one of the most significant shifts in how businesses recover the cost of capital investments. Under the revised Section 168, eligible businesses gained the ability to immediately deduct a much larger share of qualifying asset purchases, a change that fundamentally altered tax planning strategies across industries. Understanding these depreciation rules is essential for any business owner, CPA, or financial advisor looking to minimize tax liability and maximize cash flow.
This article answers one central question: what changed under the TCJA, what happened to that benefit afterward, and how should businesses respond today? Our tax advisory services team works with companies to model these decisions before assets are placed in service, when the timing still matters.
Before the TCJA, businesses could deduct 50 percent of the cost of qualifying assets in the first year through bonus depreciation. The remaining cost was recovered over the asset’s useful life using the Modified Accelerated Cost Recovery System (MACRS). While this was already a meaningful tax benefit, the TCJA dramatically expanded the provision, creating new opportunities and new complexity. A subsequent law, the One Big Beautiful Bill Act of 2025, then reversed the planned wind-down and made full first-year expensing a permanent feature again.
How the TCJA expanded 100 percent bonus depreciation
The most impactful change under the TCJA was the introduction of 100 percent bonus depreciation for qualified property placed in service after September 27, 2017, and before January 1, 2023. This meant that businesses could deduct the entire cost of eligible assets in the year they were placed in service, rather than depreciating them over multiple years. The IRS outlines the mechanics of this additional first-year depreciation allowance in its depreciation and expensing guidance.
This full expensing applied to both new and used property, a major departure from prior law, which limited bonus depreciation to new assets only. The inclusion of used property opened the door for businesses acquiring second-hand equipment, vehicles, and machinery to take advantage of the same first-year write-off that was previously reserved for brand-new purchases.
Qualifying assets under Section 168 bonus depreciation include tangible personal property with a MACRS recovery period of 20 years or less, certain computer software, water utility property, and qualified film, television, and live theatrical productions. Notably, real property such as buildings generally does not qualify, though certain qualified improvement property may be eligible under separate provisions.
The bonus depreciation phase out schedule under the TCJA
A critical planning consideration for several years was the bonus depreciation phase out that the TCJA built into the law beginning in 2023. Congress originally designed the 100 percent first-year deduction to be temporary, with the allowable percentage scheduled to decline by 20 points each year:
- 2022: 100 percent bonus depreciation
- 2023: 80 percent
- 2024: 60 percent
- 2025: 40 percent (for property acquired before January 20, 2025)
- 2026: 20 percent
- 2027 and beyond: 0 percent
This scheduled reduction meant that businesses placing assets in service in later years would recover a smaller share of the cost upfront and depreciate the remaining balance over the asset’s recovery period using regular MACRS rules. The phase out created real urgency for capital investment planning while it was in effect.
The schedule above still governs property that was acquired before January 20, 2025. As explained in the next section, however, the 2025 tax law replaced this declining schedule with permanent 100 percent expensing for property acquired after January 19, 2025. Businesses with assets acquired during the phase out years must apply the percentage in effect when the property was acquired and placed in service.
How the One Big Beautiful Bill Act restored 100 percent bonus depreciation
The most important recent development is that the declining phase out no longer applies to new purchases. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored 100 percent bonus depreciation for qualified property acquired after January 19, 2025, and placed in service after that date. The IRS describes this as a permanent 100 percent additional first-year depreciation deduction in its guidance on the additional first-year depreciation deduction amended by the One Big Beautiful Bill.
In practical terms, the dividing line is the acquisition date. Property acquired before January 20, 2025, follows the TCJA phase out percentages, so an asset acquired in 2024 and placed in service in 2024 generally carried a 60 percent rate, while qualifying property acquired and placed in service after January 19, 2025, is eligible for the full 100 percent deduction once again. The OBBBA did not change the underlying definition of qualified property, which remains tangible depreciable business assets with a recovery period of 20 years or less, including both new and used property that meets the original-use and acquisition requirements.
The 2025 law also created a separate elective 100 percent deduction for certain newly constructed qualified production property used in qualifying manufacturing, production, or refining activities. To use that provision, construction generally must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service in the United States before January 1, 2031. Because the rules for qualified production property are detailed and election-driven, businesses contemplating new facilities should model the benefit carefully before relying on it.
Section 179 deduction vs. bonus depreciation
The Section 179 deduction is often discussed alongside bonus depreciation because both allow businesses to expense asset costs in the year of purchase rather than depreciating them over time. However, they function differently and have distinct limitations.
The Section 179 deduction allows businesses to elect to expense the cost of qualifying assets up to an annual dollar limit. Under the TCJA, this limit was increased to $1 million, with a phase-out threshold that began when total qualifying property purchases exceeded $2.5 million in a given year, both indexed for inflation. The statutory framework appears in Section 179 of the Internal Revenue Code. The One Big Beautiful Bill Act significantly raised these amounts, setting the maximum Section 179 deduction at $2.5 million and the phase-out threshold at $4 million for property placed in service in tax years beginning after December 31, 2024, with annual inflation adjustments thereafter. For tax years beginning in 2026, the inflation-adjusted figures are a $2.56 million deduction limit and a $4.09 million phase-out threshold.
Key differences between the two provisions include:
- Eligibility scope: Bonus depreciation applies automatically to all qualifying property unless the taxpayer elects out. Section 179 requires an affirmative election and is subject to dollar limits.
- Used property: Both now cover used assets (the TCJA extended this to bonus depreciation).
- Income limitation: Section 179 deductions cannot exceed the taxpayer’s taxable business income for the year. Bonus depreciation has no such income cap and can generate or increase a net operating loss.
- Phase-out mechanics: Section 179 phases out dollar-for-dollar once total asset purchases exceed the threshold. Bonus depreciation has no dollar ceiling and, for property acquired after January 19, 2025, is once again a flat 100 percent.
Many businesses use both provisions together. A common strategy is to apply Section 179 first to selected assets (particularly those with longer recovery periods that do not qualify for bonus depreciation), then claim bonus depreciation on remaining eligible property. This layered approach maximizes the total first-year deduction.
What property qualifies for bonus depreciation
Not all business assets qualify for bonus depreciation. Qualified property generally includes tangible depreciable property with a MACRS recovery period of 20 years or less. In practical terms, this covers a wide range of business assets:
- Equipment and machinery: Manufacturing equipment, construction machinery, and specialized tools.
- Vehicles: Cars, trucks, and vans used for business, subject to luxury automobile depreciation limits for passenger vehicles.
- Furniture and fixtures: Office furniture, shelving, and display units.
- Computer hardware and software: Off-the-shelf software and hardware placed in service during the tax year.
- Qualified improvement property (QIP): Interior improvements to nonresidential buildings (excluding elevators, escalators, and structural enlargements) carry a 15-year recovery period and qualify for bonus depreciation following the technical correction made in the CARES Act.
Property that does not qualify includes land, buildings (structural components), property used outside the United States, and property acquired from a related party. Additionally, certain regulated utilities and property subject to floor plan financing are excluded.
Businesses should carefully document the acquisition date and the placed-in-service date for each asset, because together they determine the applicable bonus depreciation percentage. An asset acquired and placed in service after January 19, 2025, generally qualifies for the full 100 percent deduction, while an asset acquired during the earlier phase out window follows the percentage in effect when it was acquired.
How TCJA depreciation changes affect tax planning
The TCJA depreciation changes go beyond just bonus depreciation. Several related provisions work together to shape the overall depreciation landscape for businesses:
Elimination of the corporate AMT. Before the TCJA, bonus depreciation created alternative minimum tax (AMT) complications for C corporations. The repeal of the corporate AMT removed this friction, making accelerated depreciation strategies more straightforward for corporate taxpayers.
Net operating loss (NOL) changes. The TCJA limited NOL deductions to 80 percent of taxable income and eliminated the ability to carry NOLs back (with limited exceptions later restored by the CARES Act). Because bonus depreciation can generate or increase an NOL, these limitations affect the timing of when businesses realize the tax benefit.
Interest expense limitations under Section 163(j). The TCJA imposed a new limit on business interest deductions, generally capping them at 30 percent of adjusted taxable income. For capital-intensive businesses that both finance asset purchases with debt and claim bonus depreciation, these two provisions interact in ways that require careful modeling.
Cost segregation opportunities. With 100 percent bonus depreciation available again, cost segregation studies are more valuable than ever. These engineering-based analyses reclassify building components into shorter recovery periods, making them eligible for bonus depreciation. A commercial real estate owner who performs a cost segregation study might identify a meaningful portion of a building’s cost as qualifying personal property or land improvements. Investors in the real estate industry often find this the single most effective lever for accelerating deductions.
Effective tax planning requires looking at these provisions holistically. A strategy that maximizes bonus depreciation in isolation could backfire if it triggers unfavorable interactions with NOL limitations or interest expense caps.
Planning ahead with permanent bonus depreciation
With 100 percent bonus depreciation restored on a permanent basis for property acquired after January 19, 2025, the planning calculus has shifted away from racing the clock and toward optimizing how and when to combine available incentives. Several practical steps can help:
Coordinate bonus depreciation with Section 179. Because both provisions now offer generous first-year expensing, the goal is to sequence them efficiently. Section 179 is useful for property that does not qualify for bonus depreciation or to fine-tune the deduction against taxable income, while bonus depreciation can be applied broadly without an income cap.
Mind the acquisition date. The 100 percent rate applies to property acquired after January 19, 2025. Assets acquired earlier may still be governed by the older phase out percentages, so documentation of the binding acquisition and placed-in-service dates remains important.
Model the interactions. Full expensing can create or enlarge a net operating loss and can interact with the Section 163(j) interest limitation. Running these provisions together, rather than in isolation, helps confirm that an accelerated deduction actually produces the intended cash-flow benefit.
Invest in cost segregation. For real estate investors and business property owners, a cost segregation study remains one of the most effective ways to maximize depreciation deductions. With full bonus depreciation available, the value of reclassifying components into shorter recovery periods is even greater, and the upfront cost of the study is typically recovered many times over through accelerated deductions.
Frequently asked questions
What is bonus depreciation?
Bonus depreciation is a federal tax incentive that allows businesses to immediately deduct a percentage of the cost of qualifying assets in the year they are placed in service, rather than spreading the deduction over the asset’s useful life. The TCJA set this percentage at 100 percent for property placed in service between September 27, 2017, and December 31, 2022, then scheduled a phase down. The One Big Beautiful Bill Act of 2025 later restored a permanent 100 percent deduction for qualified property acquired after January 19, 2025.
What qualifies for bonus depreciation?
Qualified property includes tangible personal property with a MACRS recovery period of 20 years or less, certain computer software, and qualified improvement property. Both new and used assets qualify, provided the used property was not previously used by the taxpayer and was not acquired from a related party. Land, buildings, and property used outside the U.S. are excluded.
What is the difference between bonus depreciation and Section 179?
Both provisions allow first-year expensing, but Section 179 is elective and subject to annual dollar limits and a taxable income cap. Bonus depreciation applies automatically (unless elected out), has no dollar ceiling, and can create a net operating loss. Many businesses use both together to maximize deductions.
What are the current bonus depreciation rules?
For qualified property acquired after January 19, 2025, businesses can deduct 100 percent of the cost in the first year, and the One Big Beautiful Bill Act made this permanent. Property acquired before January 20, 2025, follows the TCJA phase out percentages in effect when it was acquired, such as 80 percent in 2023 and 60 percent in 2024.
What were the bonus depreciation phase out percentages under the TCJA?
Before the 2025 law, the first-year deduction was scheduled to decline by 20 points annually: 100 percent through 2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and 0 percent from 2027 onward. Those percentages still apply to property acquired before January 20, 2025.
Can you take Section 179 and bonus depreciation on the same asset?
Yes, but the Section 179 deduction is applied first. Any remaining cost basis that was not expensed through Section 179 may then be eligible for bonus depreciation. This is common with vehicles, where luxury auto limits cap the total first-year deduction, and businesses layer both provisions to maximize the write-off within those limits.
