Understanding Bonus Depreciation and How It Works

If you purchase $250,000 worth of equipment this year, you may be able to deduct the full amount from your taxable income in the same year. This tax rule is called bonus depreciation, and it can free up cash for other business needs. 

In 2025, the law still allows 100% bonus depreciation, which means qualifying assets can be written off immediately instead of over several years. 

This can make a big difference in cash flow and help you plan larger investments without waiting for long-term tax benefits. 

In the next sections, we’ll explain how bonus depreciation works, what assets qualify, and how to use it effectively for your business or clients.

Key Takeaways:

1. Thanks to the One Big Beautiful Bill Act, U.S. businesses can immediately deduct 100% of the cost for eligible assets acquired and placed in service after January 19, 2025, with no phase-out schedule.
2. Assets with a 20-year or less recovery period, including machinery, equipment, vehicles, computer software, and Qualified Improvement Property (QIP), qualify. Both new and used property (if acquired from unrelated parties) can be claimed.
3. Combining bonus depreciation with Section 179 expensing allows you to maximize deductions while controlling taxable income. Section 179 first, then bonus depreciation for remaining eligible costs.
4. Cost segregation studies, strategic timing of purchases, and correct placed-in-service documentation can significantly increase deductions, especially for real estate and multi-asset acquisitions.
5. Because elections are often irrevocable and state rules vary, working with tax professionals, like VJM Global, ensures accurate compliance, optimal tax results, and alignment with both U.S. and international expansion plans.

What Is Bonus Depreciation?

Bonus depreciation, officially called the additional first-year depreciation deduction under Section 168(k), lets you deduct the entire cost of qualifying assets in the year they’re placed in service. 

Instead of spreading out write-offs across five, seven, or even twenty years, you claim the full tax benefit upfront. For U.S. businesses, this means bigger deductions and faster cash flow relief.

Traditionally, asset purchases (like machinery or computers) were written off annually. For example, a $100,000 equipment purchase would result in $20,000 deductions over five years. With bonus depreciation, you deduct the whole $100,000 in year one, putting that money back into your business immediately.

Bonus depreciation started as a stimulus measure at 30% in 2002. Over the years, Congress increased rates, reaching 100% after the Tax Cuts and Jobs Act (TCJA) in 2017. 

The TCJA set up a phase-out: 100% for assets placed in service through 2022, then dropping by 20% each year, set to reach 0% in 2027.

Key Differences from Regular Depreciation

• Bonus Depreciation: Deducts up to 100% of the eligible asset cost in the first year.
• Regular Depreciation: Spreads deductions evenly across several years based on asset class.
• Immediate Benefit: Boosts cash reserves, making it easier to reinvest in your business.
• Net Operating Loss Creation: If deductions exceed income, you can carry losses forward.

The One Big Beautiful Bill Act (OBBBA): Updates for 2025

In July 2025, the “One Big Beautiful Bill Act” permanently restored 100% bonus depreciation. To qualify, property must be acquired and placed in service after January 19, 2025. 

If it was acquired before this date, even if placed in service later, it only qualifies for the previous year’s lower rate (40% for 2025).

Summary of OBBBA Changes

1. Permanent 100% rate for assets acquired/placed in service after Jan. 19, 2025.
2. Applies to both new and used assets (including computer software, vehicles, equipment, and qualified improvement property).
3. Businesses can elect a reduced 40% rate for the first year if they prefer, to help manage income.
4. This new clarity means you can plan large investments without worrying about depreciation schedules, making bonus depreciation one of the most powerful tax-saving strategies available to U.S. businesses in 2025.

If you want to learn which assets qualify and how to maximise this tax break, keep reading, next, we’ll break down eligibility rules and qualifying property under Section 168(k).

Also Read: Understanding Why Companies Use Accrual Accounting

Now that you know the basics, let’s look at which types of property actually qualify for bonus depreciation and what rules you’ll need to follow.

Complete Eligibility Guide: What Qualifies for Bonus Depreciation in 2025

You can claim bonus depreciation only on assets classified as eligible property under IRS rules. 

The key types include:

MACRS Property (Modified Accelerated Cost Recovery System): Tangible business assets with a recovery period of 20 years or less. This covers machinery, heavy equipment, furniture, computers, and vehicles.

Computer Software: Off-the-shelf software purchased for business use may qualify.

Vehicles & Equipment: Business vehicles (trucks, vans, heavy SUVs), office furniture, manufacturing gear, and more. Note: Passenger automobiles under 6,000 pounds have first-year deduction caps, check the current IRS limits.

Qualified Improvement Property (QIP): Interior improvements made by the taxpayer to non-residential (commercial) buildings, such as new HVAC, lighting, drywall, or ceilings. Building enlargements, elevators, escalators, or structural frameworks do NOT qualify.

Qualified Production Property (QPP): For manufacturing businesses, assets built or acquired specifically for production after January 19, 2025, are eligible for 100% expensing under OBBBA.

The Four Critical Requirements for Eligible Assets

1. Property Type Specification 

Only tangible property with a recovery period of 20 years or less, including certain software and improvements, is eligible.

2. Original Use or Used Property Requirements 

The new property qualifies. Used property qualifies if acquired in an arm’s-length transaction and the taxpayer has not previously used it.

Related parties or previously used assets by the taxpayer are excluded; this avoids "churning" assets for additional deductions.

3. Placed-in-Service Timing 

Assets must be placed in service in your business after January 19, 2025, for 100% bonus depreciation eligibility. If acquired on or before this date, the previous (reduced) rate applies.

4. Acquisition Date Requirements 

Property acquired under a binding written contract dated before January 19, 2025, will not qualify for the 100% rate, even if placed in service after this date. it will get only the previous year’s lower rate.

The acquisition date for bonus depreciation is when the binding contract is executed, not when you take physical possession.

Exclusions and Limitations

Certain property types are NOT eligible for bonus depreciation:

• Land and Real Estate Structures: Land itself and the structural components of buildings.
• Public Utility Property: Assets used in public utilities are excluded from bonus depreciation.
• Related Party Transactions: Used property acquired from a related party (as defined by the IRS), or previously used by you, is excluded.
• Assets Used and Disposed of in the Same Year: Property placed in service and disposed of within the same year does not qualify.
• Term Interests Held by Related Persons: Excludes some temporary interests in property where related parties are involved (see IRS definitions for details).

Also Read: How to Manage Accounting for Small Businesses

Quick Examples

Qualifies

• Buy $85,000 worth of new heavy machinery after January 19, 2025, and deduct 100% via bonus depreciation.
• Enhance your commercial office with new lighting and ceilings; these QIP improvements also qualify.
• Purchase software, deduct the full cost if used exclusively for business.

Does Not Qualify

• Acquire a building from a related company or purchase land.
• Receive equipment previously used in your company.
• Add an elevator or expand the building’s footprint.

If you want to write off new assets fast and free up cash to invest elsewhere, confirm the asset fits IRS definitions, secure it after January 19, 2025, and never purchase from related parties. 

For complex cases, like mixed-use property, building upgrades, or asset purchases through mergers, consult your tax advisor or VJM Global’s experts so your business gets the full value from bonus depreciation.

Get in touch with our expert

Once you know your assets are eligible, the next step is figuring out how to accurately calculate your bonus depreciation deduction.

Bonus Depreciation Calculations: Step-by-Step Examples

Bonus depreciation can be a game-changer for your business’s tax planning. Here’s how you can confidently calculate and maximize this deduction.

A. Basic Calculation Method

Let’s break down the steps for bonus depreciation calculation:

1. Original Cost Determination: Start with the full purchase price of your eligible asset.
2. Subtract Section 179 Deductions: If you’ve elected Section 179 expensing, subtract that amount first. Section 179 applies up to its annual limits.
3. Less: Tax Credits Claimed: Subtract any applicable tax credits for the asset, if relevant.
4. Multiply by Applicable Bonus Rate: For 2025, the bonus depreciation rate for qualifying property is typically 40%, unless the recent OBBBA update applies to your asset, making it 100% for certain properties acquired and placed in service after January 19, 2025.

Formula Example:

Bonus Depreciation Deduction = (Asset Cost−Section 179 Tax Credits) × Bonus Rate

Also Read: Accounts Payable Outsourcing Costs and Savings

B. Comprehensive Examples by Asset Type

Example 1: Equipment Purchase

You buy $500,000 in manufacturing equipment. You’ve already applied $150,000 in Section 179. The 2025 bonus rate is 100% for eligible purchases under OBBBA, otherwise 40%.

• Cost after Section 179: $500,000 - $150,000 = $350,000
• Bonus Depreciation Deduction (100%): $350,000 x 100% = $350,000
  OR
• Bonus Depreciation Deduction (40%): $350,000 x 40% = $140,000

Tax Savings Impact:

• Say your tax rate is 21%, 25%, or 37%.
• 21% of $350,000 = $73,500 tax savings
• 25% of $350,000 = $87,500 tax savings
• 37% of $350,000 = $129,500 tax savings

Your business keeps more cash for reinvesting or covering expenses.

Example 2: Technology Assets

You invest $50,000 in software and computer systems. No Section 179 applied.

• $50,000 x Bonus Rate (let’s use 100% for OBBBA assets): $50,000 deduction in year one

Regular depreciation would split this over several years, limiting immediate savings.

Example 3: Vehicle Fleet (Including Luxury Auto Rules)

Business vehicles often qualify, but passenger autos face first-year deduction caps. For luxury vehicles placed in service in 2025:

• First-year bonus depreciation limit: $20,200
• First year without bonus depreciation: $12,200

Heavy SUVs and trucks (over 6,000 pounds gross vehicle weight) aren’t limited and can leverage full bonus depreciation, but lighter passenger cars follow these IRS caps.

C. Complex Scenarios

Mixed Asset Purchases in a Single Year

If you buy a mix of assets (equipment, computers, vehicles):

• Apply Section 179 first to maximize immediate deductions on assets with short lives.
• Calculate bonus depreciation on remaining costs for each asset class at their respective rates.
• Use MACRS for any leftover depreciable basis.

Combination with Section 179 Expensing

For purchases above the Section 179 limit (e.g., >$1.22M in 2025), apply Section 179 up to the cap, then bonus depreciation for the rest, and use regular depreciation for the final basis.

Cost Segregation Study Integration

Suppose you purchase property with multiple components (buildings, fixtures, land improvements). In that case, a cost segregation study can separate eligible assets so you can apply bonus depreciation on items with recovery periods of 20 years or less. 

This unlocks much larger first-year deductions and bigger cash tax savings for complex purchases.

Also Read: What is the Percentage of Completion Accounting Method?

As you plan your deductions, understanding how bonus depreciation compares with Section 179 can help you get the most out of each option.

Bonus Depreciation vs. Section 179: Strategic Comparison

When planning your business asset purchases, understanding how bonus depreciation stacks up against Section 179 is key for maximizing tax benefits. Here’s what you need to know:

Key Differences Matrix

• Section 179 is more flexible, letting you select which assets (and how much) to expense.
• Bonus depreciation requires applying the deduction to all assets in a category (asset class) purchased that year.
• Section 179 is capped by law ($2.5M in 2025), while bonus depreciation has no dollar or income limitation.
• Both can apply to new and “first-use” used assets acquired from unrelated parties.

Strategic Applications: When should you use each method?

• Section 179 is ideal for selective, smaller purchases or when you want to target specific assets for expense. It’s also preferred in states that don’t fully conform to federal bonus depreciation rules.
• Bonus depreciation works best for large investments or when deductions exceed your business income. It’s not capped, so you can use it to create or increase a net operating loss for future tax years.

How do you combine both?

Most businesses apply Section 179 first. Once you hit the Section 179 or income limit, apply bonus depreciation to the remaining asset basis. 

This two-step approach maximizes your current-year deductions while keeping flexibility for future years.

Income management strategies

• Use Section 179 to control your taxable income and avoid pushing your business into a loss.
• Use bonus depreciation to claim larger deductions, especially if you plan to carry forward a net operating loss.
• Mix both for optimal outcomes: Section 179 first for preferred assets, bonus depreciation for the rest.

Understanding the strengths and limits of each method helps you time major purchases, forecast tax outcomes, and support your clients with smart planning.

 If you want advice on maximizing both Section 179 and bonus depreciation for your U.S. business’s unique needs, VJM Global’s team can guide you through every step, so you keep more of what you earn and reinvest in future growth.

Also Read: Notes Payable vs Accounts Payable: Key Differences Explained

Sometimes, taking every available deduction isn’t the best move—let’s explore when and why you might choose to opt out of bonus depreciation.

The Election-Out Decision: When and How to Opt Out of Bonus Depreciation

Choosing to elect out of bonus depreciation is a strategic move that can impact your current and future tax liability. Knowing when and how to opt out can help you maximize tax advantages, avoid surprises, and plan with precision.

A. Strategic Reasons to Elect Out

Why would you skip immediate bonus depreciation and spread deductions over several years? Here are the situations where this makes sense:

1. Income Smoothing: If your business expects higher profits in future years, saving deductions by electing out allows you to offset future income rather than using them up in a low-income year.

2. Alternative Minimum Tax (AMT): Bonus depreciation can trigger or increase AMT liability. Electing out can reduce exposure, giving you more control over how depreciation impacts your tax situation.

3. Future Year Planning: If you're tracking income spikes (like large contracts, business sales, or other big events), you might want steady deductions later. Opting out gives you this flexibility.

4. State Tax Conformity Issues: Not every state allows federal bonus depreciation. Electing out prevents large federal tax deductions that may not be useful on your state return, avoiding complex adjustments.

5. Passive Activity Loss Limitations: For investors or businesses facing limits on passive losses, bonus depreciation might create losses you can’t use. Electing out preserves these deductions for more favorable years.

B. Elect Out Process and Requirements

If you decide to elect out, here’s how to do it properly; mistakes can’t be easily reversed!

1. Election on Form 4562

• File IRS Form 4562, “Depreciation and Amortization,” with your original tax return for the year the property is placed in service, not with amended returns.
• Attach a statement specifying the asset class(es) you are electing out for, referencing IRC Section 168(k)(7).
• Keep clarity: The election applies only to property in that specific class for that tax year.

2. Class-by-Class Election Rules

• You must elect out for all property within an asset class placed into service that year (for example, all five-year property).
• You cannot selectively pick individual assets within one class for exclusion; it’s an “all or none” rule for each category.

3. Timing and Documentation Requirements

• Election must be made on a timely filed return, including extensions.
• Maintain thorough documentation; keep copies of contracts, asset purchase details, and election statements to prove compliance if audited.

4. Irrevocable Nature of Election

• Once made, your election out of bonus depreciation is generally irrevocable; you can’t change your mind later unless the IRS allows it through formal procedures that are costly and rare.
• Consider all factors, future income, anticipated asset expansion, and state rules, before making the election.

Opting out of bonus depreciation may seem counterintuitive, but it provides powerful control over when and how deductions are used. 

Taking the time to analyze your year-end strategy, future growth, and state tax position will help you make the best choice for your business.

Also Read: How Much Does a CPA Charge for Tax Preparation

If you’re looking to truly optimize your tax outcomes, advanced planning strategies can make a significant difference to your bottom line.

Advanced Tax Planning Strategies with Bonus Depreciation

Bonus depreciation tax planning unlocks powerful opportunities for U.S. businesses to supercharge cash flow, strategically time deductions, and optimize real estate and international expansions. Here’s how to level up your strategy:

A. Cost Segregation Study Integration

Wondering how to get maximum upfront deductions on your property investments? A cost segregation study is your answer. 

This analysis breaks down a building’s cost into shorter-lived components, think carpets, electrical, and HVAC. Even specialty equipment, which can be depreciated over five, seven, or fifteen years instead of the standard 39 or 27.5 years.

With 100% bonus depreciation now permanent for most eligible assets placed in service after Jan. 19, 2025. Every dollar allocated to short-life property through cost segregation can be written off immediately. 

That means real estate investors and business owners can unlock sizable first-year tax deductions and accelerate cash flow.

• Example: If you acquire a $4 million warehouse, a cost segregation study might classify $800,000 as five- and 15-year assets. In 2025, you can deduct all $800,000 at once under the new rules, instead of just $411,000 at the old 40% rate.
• Maximizing QIP: Qualified Improvement Property (QIP), like lighting, interior drywall, or flooring in commercial buildings, can be identified and fully expensed in the first year, further supercharging your tax benefits.

For best results, engage specialists who understand both engineering and IRS compliance to ensure assets are classified correctly and documentation stands up to audit scrutiny.

B. Multi-Year Planning Considerations

Getting the timing right on asset purchases and deductions is crucial. Here’s how to plan for continuous savings, year after year:

• Asset Timing Strategies: Plan major acquisitions for after Jan. 19, 2025, to guarantee 100% bonus depreciation. For long-construction projects, document acquisition and construction dates are carefully coordinated to maximize eligibility.
• Income and Deduction Matching: Use accelerated deductions to offset periods of high income, or strategically elect out of bonus depreciation when it’s more valuable to spread deductions over future years.
• Business Expansion Planning: Use bonus depreciation and expanded Section 179 allowances to reduce the after-tax cost of growth, whether you’re adding equipment, retrofitting facilities, or building new production sites. Pair these breaks with other tax credits and incentives for optimal ROI.

Don’t forget state-level planning: Some states decouple from federal bonus depreciation, so coordinate federal and state schedules to avoid unwanted surprises.

C. International Business Considerations

Cross-border asset investments require careful planning to capture bonus depreciation benefits and avoid complications:

1. U.S. Subsidiary Structures for Foreign Companies: Setting up a U.S. subsidiary allows foreign businesses to utilize bonus depreciation on qualified assets if placed in service domestically. Structure acquisitions to maximize eligibility and document all contracts and placed-in-service dates.

2. Cross-Border Acquisition Planning: When acquiring assets for a global expansion, check U.S. and foreign-country depreciation rules. Bonus depreciation can make U.S. expansion much more attractive from a tax and cash-flow standpoint.

3. India Expansion Implications: If your U.S. business is expanding into India, VJM Global guides you through navigating local depreciation rules and synchronizing asset purchases and entity structures on both sides. 

This ensures your cross-border investment is tax-optimized and compliant with both IRS and Indian regulatory requirements.

Also Read: Strategic Tax Planning Services for Businesses

With these strategies in mind, you’re ready to put a concrete action plan in place to maximize your bonus depreciation benefits in 2025.

Maximizing Your Bonus Depreciation Benefits: Best Practices

As you plan your investments for 2025, these steps can help you maximize bonus depreciation and keep more cash in your business:

1. Asset Acquisition Timing: Purchase and acquire eligible assets after January 19, 2025, to lock in 100% bonus depreciation. Earlier purchases may only qualify for reduced rates.
2. Placed-in-Service Considerations: Ensure all assets are not just acquired, but also fully operational, “placed in service”, before year-end. The IRS considers an asset placed in service when it’s ready and available for its intended use.
3. Documentation Requirements: Keep detailed purchase records, including acquisition contracts, bills of sale, and service/start-up dates. Good documentation is vital for IRS compliance and future audits.
4. Review Asset Classes: Assess which assets qualify for bonus depreciation under MACRS (20-year life or less), ensuring you categorize properties like computers, vehicles, and QIP separately for proper treatment.
5. Coordinate Section 179 and Bonus Depreciation: Apply Section 179 expensing first for assets with tighter eligibility or state-level preferences, then maximize bonus depreciation on the remaining qualifying property.

Also Read: Comprehensive Cross-Border Tax Planning Strategies

Professional Consultation Framework

Deciding when to engage with tax experts is crucial:

• Complex Purchases & Multi-State Operations: Consult a professional if you have mixed asset acquisitions or operate in states with different depreciation rules.
• Tax Strategy Optimization: Get help timing purchases for optimal deductions and understanding the interplay between bonus depreciation and Section 179.
• Documentation & IRS Forms: Work with an advisor to ensure timely, accurate filing of IRS Form 4562 and supporting schedules, especially if electing out or dealing with large investments.

How VJM Global Supports U.S. Businesses and CPA Firms

• Offers specialized advice on bonus depreciation planning for cross-border operations.
• Supports asset acquisition timing and documentation for compliance.
• Guides the integration of Section 179 and bonus depreciation strategies to maximize savings.
• Assists with IRS forms and audit-ready records.
• Advises on state/federal rules for businesses expanding into India.

VJM Global’s Core Services

• Accounting & Bookkeeping Outsourcing: Secure and efficient management of financial records for U.S. businesses.
• Audit Support & Outsourcing for CPA Firms: Reliable offshore teams to scale up during busy seasons.
• Company Registration in India: End-to-end support for U.S. firms entering the Indian market, ensuring compliance and cost control.

With these strategies in mind, you’re ready to put a concrete action plan in place to maximize your bonus depreciation benefits in 2025.

Conclusion

Bonus depreciation remains one of the most effective tax tools for U.S. businesses, especially with the permanent 100% rate for qualifying assets acquired after January 19. 

From accelerating deductions on equipment, vehicles, and QIP to leveraging cost segregation for real estate, the opportunities extend far beyond a single tax year. 

The right strategy can boost cash flow, support expansion, and lower overall tax liability while keeping your operations fully compliant.

However, bonus depreciation planning requires precision; missteps in timing, documentation, or asset classification can reduce or eliminate the benefit. Professional guidance ensures every deduction is optimized, every rule followed, and every opportunity captured.

Ready to maximize your bonus depreciation benefits? 

Contact VJM Global's expert team for personalized strategies that align with your business goals and ensure full compliance. With expert planning, you can invest confidently today and enjoy sustainable tax savings for years to come.

FAQs:

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1. Is bonus depreciation available for real estate?

Bonus depreciation doesn’t apply directly to land or buildings, but qualified improvement property (QIP), like interior upgrades to nonresidential buildings, does qualify. A cost segregation study can help identify eligible building components.

2. Can I choose not to use bonus depreciation?

Yes. Taxpayers can elect out of bonus depreciation on a class-by-class basis. This election must be made when filing your return with Form 4562, and is generally irrevocable for that year.

3. What changed in 2025 with the new law?

The OBBBA permanently reinstated 100% bonus depreciation for assets acquired and placed in service after January 19, 2025, eliminating the previous phaseout. This means you can fully deduct qualifying property without yearly reductions.

4. Can bonus depreciation create a business loss?

Yes. If bonus depreciation exceeds your taxable income, it can create a net operating loss, which can be carried forward to offset future income.

5. What’s the difference between bonus depreciation and Section 179?

Section 179 lets you selectively expense assets up to $2.5M (2025 limit) and is limited by taxable income, while bonus depreciation has no dollar or income cap and applies automatically to all eligible assets unless you opt out.

6. How do I report bonus depreciation?

Report bonus depreciation on IRS Form 4562 when filing your federal tax return for the year the property is placed in service. Attach documentation for acquisition and the placed-in-service dates.

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