Bonus Depreciation: How the 100 Percent Write-Off Works
The special depreciation allowance after the 2025 law — what qualifies, the acquisition-date rule, and how it interacts with section 179
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Bonus depreciation (the "special depreciation allowance") lets a business deduct a fixed percentage of an asset's cost in the year it is placed in service, before regular depreciation. The 2025 legislation restored the rate to 100 percent for qualifying property acquired after January 19, 2025. Unlike section 179, it has no dollar limit and no income limitation.
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What is bonus depreciation?
It is an additional first-year deduction, applied automatically unless the taxpayer elects out, equal to the applicable percentage of the asset's basis. The remaining basis (zero, at 100 percent) is depreciated under MACRS over the asset's normal recovery period. Because it applies by class of property rather than asset by asset, a business that wants bonus on its trucks but not its furniture must elect out for the 7-year class as a whole. The election out is made on a timely filed return and is irrevocable.
What property qualifies?
| Qualifies | Does not qualify |
|---|---|
| MACRS property with a recovery period of 20 years or less (equipment, vehicles, furniture, computers, land improvements) | Buildings (27.5- and 39-year property) |
| Qualified improvement property (interior improvements to nonresidential buildings) | Property required to be depreciated under ADS |
| Computer software (off the shelf) | Property acquired from a related party or in a carryover-basis transaction |
| Certain plants and film/TV productions | Property the interest-limitation election forces onto ADS — an electing real property business's buildings and QIP, an electing farm's property with a recovery period of 10 years or more (their equipment and vehicles still qualify); property of regulated utilities and of businesses deducting floor-plan financing interest |
| New or used property, if the taxpayer had not previously used it | Property acquired before the effective date under a binding contract (the prior, lower percentage applies) |
The used-property rule, added in 2018, is what makes bonus depreciation reach small businesses buying second-hand trucks and equipment: the property must simply be new to the taxpayer, acquired by purchase from an unrelated party.
What is the acquisition-date rule?
The 2025 legislation's 100 percent rate applies to property acquired after January 19, 2025 and placed in service after that date. "Acquired" generally means the date a written binding contract was entered into — so equipment ordered under a binding contract before the effective date but delivered after it may fall under the old, lower percentage even though it was placed in service later. Businesses with large orders straddling the date check the contract date, not the delivery date. Property acquired before January 20, 2025 keeps the old phase-down — 40 percent if placed in service in 2025, 20 percent in 2026 — and for its first tax year ending after January 19, 2025 a business may elect 40 percent instead of 100 percent (60 percent for long-production-period property and certain aircraft).
How does bonus interact with section 179 and MACRS?
The order is fixed: section 179 first (if elected), then bonus depreciation on the remaining basis, then MACRS on whatever is left. At 100 percent bonus, MACRS depreciation is zero — but the asset still has a MACRS class, which matters for recapture (bonus is depreciation for recapture purposes; the recapture guide) and for the qualified business income deduction's property component, where the asset counts at its full unadjusted basis for its full depreciable period even though it was written off in year one (the UBIA guide).
Can bonus depreciation create a loss?
Yes — and this is its main difference from section 179. A business that buys US$400,000 of equipment in a year with US$100,000 of profit deducts all US$400,000 and reports a US$300,000 loss. For a pass-through owner, that loss is then subject to the excess business loss limitation (an indexed annual cap on business losses that offset non-business income — the excess becomes a net operating loss carryforward) and, for S corporation shareholders, to stock-and-debt basis limits. A loss that can't be used is deferred, not lost, but the deferral is why a taxpayer sometimes elects out of bonus and uses MACRS or partial section 179 instead.
When should a business elect out?
When the deduction is worth more later: a startup with no income whose losses would only pile into a net operating loss; a business expecting much higher tax rates in coming years; a pass-through owner already over the excess business loss cap; a business in a state that doesn't conform to bonus and would face a large state-federal difference; or an S corporation shareholder without the basis to absorb the loss. The election out is by class, per year, and is made on the return.
Worked example
A landscaping company with US$150,000 of profit buys three trucks (US$165,000, over 6,000 pounds) and US$60,000 of mowers and equipment in April, all under binding contracts signed after the 2025 legislation's effective date. Without any election, 100 percent bonus depreciation applies to both the 5-year (trucks) and 7-year (equipment) classes: US$225,000 deducted, a US$75,000 loss. The owner's spouse has US$120,000 of wages, so the loss is used in full this year (well under the excess business loss cap). Had the owner preferred to keep US$150,000 of income to absorb other deductions, she could have elected section 179 on exactly US$150,000 of the assets and elected out of bonus on the rest, spreading the remainder under MACRS.
Frequently asked questions
What is bonus depreciation?
An additional first-year depreciation deduction equal to a fixed percentage of an asset's cost, applied automatically to qualifying property unless the taxpayer elects out.
Is bonus depreciation 100 percent again?
The 2025 legislation restored the 100 percent rate for qualifying property acquired and placed in service after January 19, 2025, with the written binding contract date deciding when property was acquired; property acquired earlier falls under the prior phase-down — 40 percent if placed in service in 2025, 20 percent in 2026.
Does used property qualify?
Yes, provided the property is new to the taxpayer, was acquired by purchase from an unrelated party, and was not previously used by the taxpayer.
Can bonus depreciation create a loss?
Yes. Unlike section 179, it has no business income limitation. The resulting loss is subject to the excess business loss limitation and, for S corporation shareholders and partners, to basis limits.
Official sources
Publication 946 states: “Unless you elect out, you must take a 100% special depreciation allowance for certain qualified property (including long production period property and certain aircraft) acquired and placed in service after January 19, 2025.” — Internal Revenue Service, Publication 946, How To Depreciate Property, https://www.irs.gov/publications/p946
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