Bonus depreciation can deduct eligible asset basis in the first year. Learn the restored 100% rule, qualifying property, elections, and California differences.
Bonus depreciation — formally the additional first-year depreciation deduction — allows a taxpayer to deduct a specified percentage of eligible property's adjusted basis in the year the property is placed in service. It is separate from Section 179 and regular MACRS depreciation.
Under current federal law, qualified property acquired and placed in service after January 19, 2025, generally qualifies for permanent 100% bonus depreciation. Transition rules matter for property acquired before January 20, 2025 or placed in service around that date. Eligibility, binding-contract rules, elections, business use, and other limitations must be checked rather than assuming every 2025 purchase receives 100%.
Qualified property commonly includes eligible tangible property with a MACRS recovery period of 20 years or less, certain computer software, qualified improvement property, and specified plants. New and certain used property can qualify, but used property must satisfy acquisition requirements, including rules involving prior use by the taxpayer and related parties.
Land does not qualify because it is not depreciable. Buildings with longer recovery periods generally do not qualify under the ordinary 20-years-or-less rule, although qualified improvement property or separate components may. Property used in certain excluded trades or transactions and property subject to specified elections can be ineligible.
The typical depreciation sequence is:
Suppose Coastal's $42,000 machine is qualified property acquired and placed in service after January 19, 2025, is used entirely for business, and no limitation or exclusion applies.
| Schedule | Year-one deduction | Notes |
|---|---|---|
| Book straight line (6 yr) | $7,000 | No salvage value assumed |
| Federal 100% bonus depreciation | $42,000 | Full basis, year one |
| California (nonconforming) | Separate state schedule | Calculated under CA rules |
Book depreciation can still be $7,000 per year over a six-year useful life. California can also continue depreciating its separate basis because it does not conform to federal bonus depreciation. Three schedules can therefore show three different year-one amounts without any of them being inherently wrong.
Both dates can matter. "Acquired" can depend on when a binding written contract was entered into or when self-constructed property rules treat acquisition as beginning. "Placed in service" means ready and available for its specific use, not merely ordered, paid for, or delivered.
For certain property acquired before January 20, 2025 but placed in service later, prior-law phase-down rules can apply rather than the restored 100% rule. The 2025 Form 4562 instructions and IRS Notice 2026-11 address transition rules and elections. Preserve contracts, invoices, delivery records, installation reports, and evidence of operational readiness.
Bonus depreciation generally applies automatically to eligible property unless the taxpayer makes a timely election out for a class of property. An election out may be considered when a slower deduction better matches expected taxable income, loss limitations, credits, state effects, or future tax rates. The election generally applies to all qualified property in the selected class placed in service during the year, not whichever individual asset produces the preferred result.
For the first tax year ending after January 19, 2025, current guidance also provides an election to use the prior 40% rate — or 60% for specified long-production-period property or certain aircraft — instead of restored 100% bonus for applicable property. This is a technical transition choice that should be reviewed with the return's facts and instructions.
Section 179 is elective, has annual investment and taxable-income limitations, and can apply to categories that do not line up perfectly with bonus property. Bonus depreciation is generally not limited by business taxable income and can create or increase a net operating loss, subject to other rules. It generally applies automatically unless elected out. See Bonus Depreciation vs. Section 179 for a full comparison.
Neither provision makes personal spending deductible. Mixed-use and listed property can have business-use thresholds and recapture consequences.
An immediate deduction reduces adjusted tax basis. If the property is sold, converted to personal use, or business use falls, gain, recapture, or other adjustments can result. Bonus depreciation changes timing; it does not guarantee permanent tax savings equal to the deduction multiplied by today's rate.
Large deductions can also interact with passive-activity rules, at-risk limits, excess business-loss rules, basis limits, financing covenants, financial statements, and state returns. Tax planning should compare the full projected result, not only the largest first-year deduction.
California does not conform to federal special or bonus depreciation. A California taxpayer generally adds back the federal-state difference through the applicable return process and claims California depreciation under state rules over time. The precise form depends on whether the activity is reported by an individual, corporation, partnership, LLC, estate, or trust.
This creates separate adjusted basis and later depreciation. When the asset is sold, federal and California gain can differ. Keep an asset-level California schedule from the first year rather than reconstructing it at disposition.
Heath Income Tax can help evaluate depreciation elections and maintain federal and California basis schedules for business assets.
Is bonus depreciation 100% in 2025?
Generally, qualified property acquired and placed in service after January 19, 2025 is eligible for 100%. Property connected to earlier acquisition dates or the transition period can follow different rules.
Can used property qualify?
Yes, certain used property can qualify if the statutory acquisition requirements are satisfied, including restrictions involving the taxpayer's prior use and related parties.
Can bonus depreciation create a loss?
It can generally create or increase a tax loss, but other loss-limitation and carryforward rules can restrict the current benefit.
Does California allow bonus depreciation?
No. California does not conform to the federal special or bonus depreciation allowance, so a separate state calculation is generally required.
The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.
Click a question or ask us your own.
Ask Us a Question
Message Sent!
Thank you — we'll get back to you as soon as possible.