Bonus depreciation is the additional first year depreciation allowance under section 168(k) of the Internal Revenue Code. For qualified property, the depreciation deduction that section 167(a) allows for the year the property is placed in service includes this allowance, and the property’s adjusted basis is then reduced by the amount deducted before any other depreciation is computed, for that year and every year after (26 U.S.C. 168(k)(1)).
The rate is 100 percent of adjusted basis for property acquired after January 19, 2025 (Public Law 119-21, section 70301). The IRS uses the statutory name for the same thing, the additional first year depreciation deduction (IRS, Additional First Year Depreciation Deduction (Bonus) FAQ).
None of that creates a deduction. It moves one. Regular depreciation would have spread the same basis across the recovery period the statute assigns, and this takes it all in year one instead. Where the general depreciation allowance comes from, and why it tracks cost already spent rather than value, is set out in depreciated; the method, recovery period and convention that would otherwise do the spreading are in straight line depreciation.
What Qualifies for 100 Percent Bonus Depreciation
The property test is a ceiling on the recovery period. Qualified property means property to which section 168 applies and which has a recovery period of 20 years or less, along with computer software as defined in section 167(f)(1)(B), water utility property, and qualified film, television and live theatrical productions (26 U.S.C. 168(k)(2)(A)). Qualified sound recording productions defined in section 181(f) now sit on that list too, for productions commenced in tax years ending after July 4, 2025 (IRS, Instructions for Form 4562, 2025).
The acquisition test is the second half. Either the original use of the property begins with the taxpayer, or the taxpayer’s purchase of used property meets the requirements in subparagraph (E) of section 168(k)(2), which are that the taxpayer never used the property before acquiring it and that the acquisition satisfies paragraphs (2)(A), (2)(B), (2)(C) and (3) of section 179(d) (26 U.S.C. 168(k)(2)).
The IRS breaks that used property test into five conditions, and two of them catch ordinary client situations: the property cannot be acquired from a related party or a component member of a controlled group, and the taxpayer’s basis cannot be determined in whole or in part by the seller’s adjusted basis (IRS, Additional First Year Depreciation Deduction (Bonus) FAQ). So the equipment a client buys out of a business they already control is usually outside this allowance.
Some property is out whatever it cost and whenever it was bought. Property to which the alternative depreciation system applies is not qualified property, determined without regard to a taxpayer’s voluntary election into that system (26 U.S.C. 168(k)(2)(D)). Listed property, meaning vehicles and other assets that lend themselves to personal use, is out when qualified business use is 50 percent or less, and so is property placed in service and disposed of in the same tax year, and property converted to personal use in the year it was acquired (IRS, Instructions for Form 4562, 2025).
Real Property and the 20 Year Ceiling
A rental building or an office building never qualifies for this allowance, and the reason is arithmetic rather than policy. Residential rental property runs on a 27.5 year recovery period and nonresidential real property on a 39 year period, and both are longer than the 20 year ceiling in the qualified property test (26 U.S.C. 168(c) and (k)(2)(A)).
Qualified improvement property is the exception that matters, because the statute classes it as 15-year property, which clears that ceiling (26 U.S.C. 168(e)(3)(E)(vii)). What that class covers, what it excludes, how a cost segregation study moves cost into shorter lived classes, and how an interest election can push a real property business onto the alternative depreciation system and out of this allowance are worked through in commercial real estate accounting.
Which Percentage Applies
Whether the 100 percent rate reaches an asset at all turns on the acquisition date rather than the placed in service date, and for that purpose acquisition is dated from the written binding contract rather than from the invoice or the delivery (Public Law 119-21, section 70301). A machine ordered under a contract signed after January 19, 2025 and delivered the following year is still acquired on the contract date and still takes 100 percent, which makes the contract file part of the depreciation workpaper. The rest of that Act’s changes across a business return are in one big beautiful bill.
An older tier still governs property acquired before January 20, 2025, and that tier does not sit at one rate. It steps down by the year the property is placed in service. Such property placed in service after December 31, 2024 and before January 1, 2026 is limited to 40 percent of depreciable basis, or 60 percent for property with a long production period and certain aircraft (IRS, Instructions for Form 4562, 2025).
The step down then continues into the current year. For property placed in service after December 31, 2025 and before January 1, 2027 the percentage is 20 percent, and for property with a long production period and certain aircraft placed in service in that same window it is 40 percent (26 U.S.C. 168(k)(6)). That schedule survives for these assets because the Act struck it only as to property acquired after January 19, 2025 (Public Law 119-21, section 70301). So a contract signed before January 20, 2025 leaves the asset on the older schedule, where the percentage moves with the placed in service year.
One election runs the other way and lasts a single year. For qualified property placed in service in the first taxable year ending after January 19, 2025, a taxpayer may elect 40 percent instead of 100 percent, or 60 percent for property described in subparagraph (B) or (C) of section 168(k)(2), meaning property with a long production period and certain aircraft (Public Law 119-21, section 70301 and IRS, Instructions for Form 4562, 2025).
Where the Allowance Reports on Form 4562
Part II of Form 4562 carries it on line 14, captioned Special depreciation allowance for qualified property (other than listed property) placed in service during the tax year. Listed property has a line of its own, line 25 in Part V (IRS, Form 4562, 2025).
Line 14 is not this allowance alone. The same line also carries the separate allowance for qualified production property under section 168(n), a different provision reaching nonresidential real property used as an integral part of a manufacturing, production or refining activity, on its own construction and placed in service windows. Office space, research space and storage of finished goods are ineligible there too, and leasing a building to someone else who conducts the activity generally does not qualify (IRS, Instructions for Form 4562, 2025).
The order on the form is the order of the computation. The allowance is an additional deduction taken after any section 179 expense deduction and before regular depreciation under the Modified Accelerated Cost Recovery System is figured, and the depreciable basis it runs on is the business or investment portion of cost reduced by that section 179 deduction and by the other credits and deductions allocable to the property (IRS, Instructions for Form 4562, 2025).
Section 179 expensing is a different first year deduction rather than a version of this one, because it is an election made on the specific property the taxpayer names, limited by a dollar amount and by business income, and it comes off first (IRS, Form 4562, 2025 and IRS, Instructions for Form 4562, 2025).
Say a firm places qualified equipment in service, expenses part of the cost under the election in Part I of the form, and takes the allowance on what is left.
Cost of qualified equipment placed in service 120,000
Section 179 expense deduction elected 20,000
Depreciable basis for the allowance 100,000
Special depreciation allowance at 100 percent 100,000
Adjusted basis carried into MACRS 0Nothing carries into later years, because the basis the allowance ran on came out of the asset before regular depreciation was computed. Who has to attach Form 4562 at all, and the listed property carve out inside that filing test, is set out in depreciated.
Electing Out Is by Class, and It Is Hard to Undo
The allowance is not optional in the ordinary sense. It applies to qualified property unless the taxpayer elects out, and the election runs by class of property, so making it for a class in a taxable year stops the allowance for every qualified property in that class placed in service that year, and it may be revoked only with the consent of the Secretary (26 U.S.C. 168(k)(7)).
Class of property is a defined term rather than a loose one. It means each class of property described in section 168(e), for example 5-year property, and it also makes a separate class of water utility property, a separate class of computer software, a separate class of each individual qualified film or television production, a separate class of each individual qualified live theatrical production, and a separate class of each partner’s basis adjustment in partnership assets under section 743(b) for each of those classes (26 CFR 1.168(k)-2(f)(1)(ii)).
The election is due by the due date of the return for the placed in service year, including extensions, and it is made separately by each person owning qualified property, so a partnership makes its own, an S corporation makes its own, and the common parent makes it for each member of a consolidated group (26 CFR 1.168(k)-2(f)(1)(iii)).
Missing that deadline is the expensive part. A taxpayer who does not elect out in that time and manner has to determine depreciation for the placed in service year and all later years taking the allowance into account, and the election cannot then be made through a request to change a method of accounting (26 CFR 1.168(k)-2(f)(1)(iv)). One narrow repair survives: a return filed on time without the election can still carry it on an amended return filed within 6 months of the due date, excluding extensions, with the words Filed pursuant to section 301.9100-2 entered on that return (IRS, Instructions for Form 4562, 2025).
Is 100 Percent Bonus Depreciation Coming Back?
It is already back for property acquired after January 19, 2025, and for that property it no longer has an end date. The clause that required qualified property to be placed in service before a fixed date was struck, and 100 percent replaced the applicable percentage that had been stepping down year by year (Public Law 119-21, section 70301). Property acquired before that date stays on the older stepping down schedule.
What Are the Downsides of Bonus Depreciation?
The first cost is that later years get nothing. The basis the allowance ran on is removed before any other depreciation is computed, for the placed in service year and every year after (26 U.S.C. 168(k)(1)(B)), so a fully expensed asset produces no deduction in the years a client may actually need one.
The second cost shows up at the exit. When you dispose of property for which you claimed a special depreciation allowance, gain on the disposition is generally recaptured as ordinary income up to the depreciation previously allowed or allowable for the property, including the allowance itself (IRS, Instructions for Form 4562, 2025). How far that reaches on equipment and on real property is set out in depreciation recapture.
The third is that the choice is coarse. It is made by class and by year, so a single election sweeps every asset in that class placed in service that year, and it comes back only with the consent of the Secretary (26 U.S.C. 168(k)(7)).
Firms that lose review time to fixed asset schedules and first year election workpapers can put a block of that work through Accountably’s review chain first, with a trial task.
