100% Bonus Depreciation: Section 168(k) Strategy Guide

For the last three years, businesses watched their first-year depreciation deductions shrink — 80% in 2023, 60% in 2024, and on track for 40% in 2025. Then the One Big Beautiful Bill Act (OBBBA) reversed course entirely. For property acquired and placed in service after January 19, 2025, the deduction is back to 100% under IRC Section 168(k), with no sunset scheduled. If you own a business and purchased equipment, vehicles, or made qualified building improvements this year, you may be able to deduct the full cost on your 2025 return.

What Property Qualifies for 100% Bonus Depreciation?

Bonus depreciation under Section 168(k) applies to MACRS property with a recovery period of 20 years or less. That covers nearly all tangible personal property used in a trade or business — machinery, equipment, computers, office furniture, and vehicles. The property must be acquired and placed in service after January 19, 2025, to receive the full 100% rate. Property acquired before that date but placed in service after it still follows the old phase-down schedule (40% for 2025, 20% for 2026).

Qualified Improvement Property (QIP) is a particularly valuable category. QIP covers interior improvements to nonresidential real property placed in service after the building itself was placed in service. Despite being improvements to a building, QIP has a 15-year MACRS recovery period, which makes it eligible for bonus depreciation. Exterior work, enlargements, elevators, escalators, and structural framework are excluded — those remain on the 39-year schedule.

How Does Section 179 Interact With Bonus Depreciation?

Section 179 and Section 168(k) are separate deduction mechanisms applied in sequence. Section 179 goes first and lets you immediately expense the cost of qualifying property up to a dollar limit, regardless of the bonus depreciation rate. For 2025, the Section 179 limit is $2,500,000, with a dollar-for-dollar phase-out beginning at $4,000,000 in total property placed in service. For 2026, those figures increase to $2,560,000 and $4,090,000.

After Section 179 reduces your basis, any remaining cost is eligible for bonus depreciation. This is especially powerful for heavy SUVs (over 6,000 lbs GVWR), where Section 179 is capped at $31,300 — bonus depreciation absorbs the remaining basis at 100%.

Section 179 has an important limitation: the deduction cannot exceed the taxpayer's business taxable income for the year. Bonus depreciation under Section 168(k) carries no income limitation — it can create or increase a net operating loss (NOL), which can then be carried forward indefinitely under current law.

What Are the Depreciation Caps for Business Vehicles?

Passenger automobiles (under 6,000 lbs GVWR) are subject to the "luxury auto" caps under IRC Section 280F regardless of purchase price. For vehicles placed in service in 2025 (per Revenue Procedure 2025-16):

Vehicles with a gross vehicle weight rating (GVWR) over 6,000 lbs avoid the Section 280F caps entirely. That is why the heavy SUV and pickup truck strategy remains popular — once you satisfy the SUV Section 179 cap of $31,300, bonus depreciation covers the balance at 100%.

Mixed personal and business use requires proration. If a vehicle is used 70% for business, only 70% of the available depreciation is deductible.

Should You Elect to Use Less Than 100% Bonus Depreciation?

The OBBBA allows taxpayers to elect down to 40% bonus depreciation (or 60% for long-production-period property and certain aircraft) for the first tax year ending after January 19, 2025. There are legitimate reasons to consider this:

• Section 163(j) interest limitation: The deductible business interest expense is capped at 30% of adjusted taxable income (ATI). ATI is reduced by depreciation deductions, so taking 100% bonus depreciation can shrink your ATI and limit interest deductions. An election to use 40% preserves more ATI.
• State tax conformity: Several states do not conform to federal bonus depreciation. Taking the full deduction federally while adding it back on the state return creates a timing mismatch you may want to smooth out.
• Income-based credits and deductions: Some benefits phase out at higher income levels. A large depreciation deduction may reduce income below a threshold that costs you a credit.

The election to use a lower bonus depreciation rate is made on a class-by-class basis. It is irrevocable for that year, so modeling your full tax picture before filing is essential.

How Do You Claim Bonus Depreciation? (Form 4562)

All depreciation and amortization — including Section 179 and bonus depreciation — flows through Form 4562 (Depreciation and Amortization). You must file Form 4562 if you:

• Placed any depreciable property in service during the tax year
• Claim a Section 179 deduction (including carryovers from prior years)
• Have listed property (vehicles, computers) regardless of placed-in-service date

Form 4562 requires the property description, date placed in service, cost, and the depreciation method. For bonus depreciation, the Special Depreciation Allowance is reported in Part II. For Section 179, Part I captures the election amount and any phase-out calculation.

Documentation matters. For vehicles and listed property, Part V of Form 4562 requires substantiation of business use percentage. The IRS requires a contemporaneous written record (mileage log or equivalent) — not a year-end reconstruction. Per IRS Notice 2026-11, interim guidance on the OBBBA bonus depreciation rules applies until proposed regulations are issued.

Real-World Planning Scenarios

Key Deadlines and Numbers to Know

Bonus depreciation is one of the most powerful tools in the business tax planning arsenal, but it requires precise execution — placed-in-service dates, business-use documentation, state add-back calculations, and interaction with Section 163(j) all affect the final result. A poorly timed asset purchase or a missed election can shift hundreds of thousands of dollars between tax years. Tax planning before year-end gives you control over which year captures the deduction.

For small business owners especially, the restored 100% rate is an opportunity to invest in growth while managing taxable income — but only if the assets are documented correctly and the deduction is optimized against other year-end positions like retirement contributions, estimated tax payments, and entity-level elections.

Have questions about bonus depreciation or Section 179 strategy? Contact TS CPA for a free consultation. We respond within the same day.