100% bonus depreciation is back: how to write off equipment in full

Published Thursday 20 August 2026

Table of contents

• What is bonus depreciation?
• What changed in 2025? The OBBBA and 100% bonus depreciation
• What property qualifies for bonus depreciation in 2026?
• Section 179 vs. bonus depreciation: key differences
• How to claim bonus depreciation on your tax return
• How bonus depreciation affects your cash flow
• Track equipment costs with Xero
• FAQs on bonus depreciation 2026

Key takeaways

• The One Big Beautiful Bill Act (OBBBA) permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025, reversing the Tax Cuts and Jobs Act's scheduled phase-down.
• Both new and used property with a MACRS recovery period of 20 years or less qualify for the full first-year depreciation deduction in 2026.
• Section 179 and bonus depreciation work together: Section 179 is applied first (up to $2.56 million for 2026 and subject to other limitations), and bonus depreciation covers the remaining depreciable basis.
• Bonus depreciation doesn't have a cap, and it can create a net operating loss, giving your business additional tax planning flexibility that Section 179 doesn't offer.

What is bonus depreciation?

Bonus depreciation is a federal tax incentive that lets you deduct the full cost of qualifying business property in the year you place it in service. Instead of spreading the deduction across multiple years using the standard depreciation schedule, you can write off 100% of the asset's cost up front.

Under the standard Modified Accelerated Cost Recovery System (MACRS) framework, you depreciate a piece of equipment over its assigned recovery period, typically five, seven, or 15 years depending on the asset class. That means a $200,000 truck with a five-year recovery period would generate roughly $40,000 in annual depreciation deductions.

With 100% bonus depreciation, that same $200,000 deduction hits your return in year one. The result is a significantly larger tax benefit in the year you make the purchase, rather than smaller deductions spread over the asset's useful life.

Bonus depreciation applies to both new and used property. As long as the asset is new to your business (meaning you haven't used it before), it qualifies. This expanded the pre-2017 rules, which limited bonus depreciation to brand-new assets only.

What changed in 2025: the OBBBA and 100% bonus depreciation

The Tax Cuts and Jobs Act (TCJA) introduced 100% bonus depreciation in 2017, but it was designed to phase down over time. That phase-down was already underway before Congress intervened.

The TCJA phase-down schedule reduced the bonus depreciation percentage each year:

• 100% for property placed in service from September 28, 2017, through December 31, 2022
• 80% for property placed in service in 2023
• 60% for property placed in service in 2024
• 40% for property placed in service in 2025 (under the original schedule)
• 20% for property placed in service in 2026 (under the original schedule)
• 0% for property placed in service in 2027 and beyond

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reversed this phase-down entirely. The OBBBA permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

This isn't a temporary extension. The OBBBA made 100% first-year depreciation a permanent feature of the tax code. For businesses that delayed equipment purchases during the phase-down years, the timing is significant.

The IRS released Notice 2026-11 on January 14, 2026, providing initial guidance on how to apply the restored 100% deduction. Your tax professional can use this notice to confirm eligibility for specific assets.

What property qualifies for bonus depreciation in 2026?

To claim bonus depreciation, your property must meet specific IRS requirements. The rules are broader than many business owners realize, covering a wide range of tangible and intangible assets.

Qualifying property includes:

• tangible personal property with a MACRS recovery period of 20 years or less (machinery, equipment, vehicles, computers, office furniture)
• qualified improvement property (improvements to the interior of nonresidential buildings, such as retail spaces or office build-outs)
• certain computer software that isn't classified as a Section 197 intangible
• water utility property
• qualified film, television, and live theatrical productions
• used property in the above categories, as long as it's new to your business and you didn't acquire it from a related party

A few categories don't qualify. Property excluded from bonus depreciation includes:

• real property (buildings and structural components with recovery periods longer than 20 years)
• property used outside the United States
• property acquired from a related party (as defined under IRS related-party rules)
• property you previously used before acquiring it for business purposes
• certain regulated utility property

If you're unsure whether a specific asset qualifies, your accountant can help you classify assets correctly based on the MACRS recovery period tables in IRS Publication 946.

Section 179 vs bonus depreciation: key differences

Section 179 and bonus depreciation both allow you to accelerate the deduction of business asset costs, but they work differently and serve different planning purposes. Understanding the distinctions helps you and your accountant choose the right approach for each purchase.

The two deductions differ in several important ways:

• Dollar cap: Section 179 limits the total deduction to $2.56 million for tax year 2026 (adjusted annually for inflation). Bonus depreciation has no dollar cap; you can deduct 100% of qualifying property regardless of the total amount.
• Income limitation: Section 179 deductions can't exceed your business's taxable income for the year. Bonus depreciation has no income limitation and can create a net operating loss (NOL), which you can carry forward to offset future income.
• Phase-out threshold: Section 179 begins phasing out dollar for dollar once your total qualifying property purchases exceed $4.09 million in 2026. Bonus depreciation has no phase-out; it applies in full no matter how much qualifying property you buy.
• Application order: The IRS requires you to apply Section 179 first, then bonus depreciation. This sequencing matters when you're planning large purchases.
• State conformity: Not all states conform to the federal bonus depreciation rules. California, for example, doesn't allow bonus depreciation on state returns. Section 179 conformity also varies by state, but many states follow the federal rules more closely.

For most small businesses buying equipment under $2.56 million in a given year, Section 179 alone may cover the full deduction. But if you're making larger investments, or if you want the flexibility to generate an NOL, bonus depreciation fills the gap.

How to claim bonus depreciation on your tax return

Claiming bonus depreciation requires specific documentation and the right IRS form. Follow these steps.

1. Identify all qualifying assets placed in service during the tax year. Review every equipment purchase, vehicle acquisition, and property improvement you made in 2026. Note the date each asset was placed in service, the purchase price, and whether the property is new or used.
2. Classify each asset by MACRS recovery period. Use the IRS depreciation tables (found in Publication 946) to assign the correct recovery period.
3. Determine your Section 179 election. If you're electing Section 179 on any assets, calculate that deduction first. For 2026, the maximum is $2.56 million, with a phase-out beginning at $4.09 million in total qualifying purchases.
4. Calculate bonus depreciation on the remaining basis. After applying Section 179, the remaining depreciable basis of each qualifying asset is eligible for 100% bonus depreciation. Multiply the remaining basis by 100% to determine the additional first-year depreciation deduction. You can also apply bonus depreciation in cases where other limitations prevent you from claiming Section 179.
5. Complete IRS Form 4562 (Depreciation and Amortization). Report your Section 179 election in Part I of Form 4562 and your bonus depreciation in Part II. The form also captures standard MACRS depreciation for assets that don't qualify for accelerated deductions – or assets where you've elected out of bonus depreciation.
6. Attach Form 4562 to your business tax return. Whether you file Schedule C (sole proprietors), Form 1065 (partnerships), Form 1120-S (S corps), or Form 1120 (C corps), Form 4562 must be included with the return for any year you claim depreciation deductions.

Keep your purchase invoices, financing agreements, and records of when each asset was placed in service. Your accountant will need these documents to support the deductions if the IRS asks questions.

How bonus depreciation affects your cash flow

The real impact of bonus depreciation shows up in your cash flow. Writing off equipment in year one rather than over its recovery period shifts a significant amount of tax savings to the front of the timeline.

Consider a practical example. Suppose you purchase $200,000 in qualifying equipment for your business in 2026. Your effective tax rate is 25%.

Without bonus depreciation, you'd depreciate the equipment over seven years using standard MACRS. That's roughly $28,571 per year in depreciation deductions, saving you about $7143 in taxes annually.

With 100% bonus depreciation, you deduct the full $200,000 in year one. At a 25% tax rate, that's $50,000 in tax savings in the first year, compared to just $7143 under the standard schedule.

Over the full seven-year period, the total tax savings are the same. Bonus depreciation doesn't create additional deductions; it accelerates them. That $50,000 in first-year savings could fund additional hires, cover operating expenses during a slow season, or be reinvested in growth.

This acceleration matters most when you're making large capital investments. If you're expanding your fleet, upgrading machinery, or building out a new facility, the upfront cash flow benefit can be substantial.

Keep in mind that accelerating deductions also means smaller depreciation deductions in future years. If your income is expected to be significantly higher in later years, you and your tax advisor should weigh whether front-loading the deduction is the right strategy.

Track equipment costs with Xero

Managing depreciation starts with accurate records of every asset you buy, what you paid, and when it went into service. Xero's cloud accounting software makes it straightforward to track equipment costs, categorize purchases, and pull the reports your accountant needs at tax time.

With Xero, you can connect your bank accounts to automatically capture transactions, tag asset purchases for easy reference, and generate financial reports that give you a clear view of your capital spending. When it's time to file, your accountant has everything they need to calculate Section 179 and bonus depreciation deductions.

Sign up to any Xero plan and get started today.

See what Xero can do.

FAQs on bonus depreciation 2026

Here are answers to common questions about how bonus depreciation works under the current tax code.

Is bonus depreciation permanent now?

Yes. The OBBBA made 100% bonus depreciation a permanent provision of the Internal Revenue Code, replacing the TCJA's temporary 100% bonus depreciation and its phase-down schedule.

Can you use both Section 179 and bonus depreciation on the same asset?

You can. The IRS requires you to apply Section 179 first, then claim bonus depreciation on any remaining depreciable basis, effectively letting you write off the full cost of qualifying property regardless of any Section 179 limitations.

Does bonus depreciation apply to used equipment?

It does. Both new and used property qualify, as long as the asset is new to your business and wasn't acquired from a related party.

Do all states allow bonus depreciation?

No. Several states, including California, don't conform to the federal bonus depreciation rules. Check your state's tax code or consult your accountant to determine whether you can claim the deduction on your state return.

What form do you use to claim bonus depreciation?

IRS Form 4562 (Depreciation and Amortization) is where you report both Section 179 elections and bonus depreciation deductions. It's filed as an attachment to your business tax return.