Most small business owners I talk to still think bonus depreciation is sitting at 100%. It’s not. That ship sailed at the end of 2022, and the phase-down schedule since then has cost businesses real money in taxes they didn’t have to pay, simply because nobody updated them.

The actual number for tax year 2025 is 40%. For 2026, it’s 20%. That’s the trajectory Congress set under the Tax Cuts and Jobs Act of 2017, and unless legislation changes it, bonus depreciation hits zero after 2026. If you’re reading this and you haven’t adjusted your equipment purchase timing accordingly, we need to talk.

To be clear: this article covers bonus depreciation as it applies to federal taxes in 2026, with notes on what’s changed recently. Tax law is specific to your situation, so consult a CPA before making decisions based on this. But the concepts here are real, the numbers are accurate as of July 2026, and most of what you’ll read elsewhere on this topic is either outdated or too vague to be useful.

Key takeaways
  • Bonus depreciation is 20% for tax year 2026, down from 60% in 2024 and 100% before 2023.
  • Section 179 remains at $1,220,000 for 2025 (indexed annually) and is often the better first move.
  • Used property still qualifies for bonus depreciation if it's new to your business.
  • The phase-out hits zero after 2026 unless Congress acts, making 2026 the last year it matters.
  • Eligible property includes machinery, vehicles, computers, and certain qualified improvement property.

What Bonus Depreciation Actually Does

Standard depreciation lets you deduct the cost of a business asset over its “useful life,” which the IRS defines in asset class tables. A piece of manufacturing equipment might depreciate over 7 years. A computer, 5 years. Bonus depreciation lets you accelerate a chunk of that deduction into the year you place the asset in service, instead of spreading it across five or seven or fifteen years.

The mechanic is simple: you buy a $100,000 CNC machine, place it in service in 2026, and instead of deducting $14,285 per year for 7 years, you deduct 20% (or $20,000) immediately under bonus depreciation, then depreciate the remaining $80,000 on the normal schedule. It’s a timing benefit, not a permanent tax elimination. The government gets its money eventually. You just get to defer.

That timing difference has real cash value. A dollar of deduction today is worth more than a dollar of deduction in year six.

The Phase-Down Schedule (and Why 2024 Mattered More Than You Think)

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Here’s where I see business owners make consistent mistakes. They plan equipment purchases without knowing where they are in the phase-down, and they leave money on the table.

Bonus Depreciation Rate by Tax Year
2022100%
202380%
202460%
202540%
202620%
Source: IRS Rev. Proc. 2019-33, TCJA 2017

The 2024 rate of 60% was genuinely significant. A business that bought $500,000 in qualifying equipment in 2024 could deduct $300,000 in that single year. That same purchase in 2026 yields only $100,000 in first-year bonus depreciation. Same equipment, same price, three times the immediate deduction just by buying two years earlier. That’s the kind of math that should drive purchase timing conversations with your accountant.

Tax YearBonus Depreciation Rate$500K Purchase: Immediate Deduction
2022100%$500,000
202380%$400,000
202460%$300,000
202540%$200,000
202620%$100,000
2027+0%$0

I made the mistake of underestimating this phase-down early on, back when I was advising a landscaping company on a fleet expansion. We modeled the purchase for Q1 of the following year to align with their cash flow, not realizing the rate was dropping 20 percentage points in January. A three-month timing difference cost them roughly $28,000 in deductions. I don’t forget that one.

Bonus Depreciation vs. Section 179: Pick the Right Tool

These two provisions get conflated constantly, and they’re not the same thing.

Section 179 lets you expense qualifying property immediately, up to a dollar limit ($1,220,000 for tax year 2025, adjusted annually for inflation). The critical constraint: Section 179 cannot create a tax loss. If your business has $80,000 in taxable income and you try to take a $120,000 Section 179 deduction, you’re capped at $80,000. The excess carries forward.

Bonus depreciation has no such income limitation. It can absolutely create or increase a net operating loss, which you can then carry forward to offset future profitable years. For a business in a growth phase burning through cash, that loss carryforward can be genuinely valuable.

My general rule: max out Section 179 first (especially for smaller purchases), then apply bonus depreciation to the remainder. Section 179 also covers more property types and gives you more control over which assets you’re expensing. The IRS’s guidance on Section 179 and bonus depreciation is dry but accurate if you want the technical read.

Worked example: A dental practice buys $180,000 in new equipment in 2026 and shows $210,000 in taxable income before depreciation.

Scenario A (Section 179 only): They expense the full $180,000 under Section 179. Taxable income drops to $30,000. Done.

Scenario B (Bonus only): 20% bonus depreciation yields a $36,000 deduction. Taxable income drops to $174,000. Remaining $144,000 depreciates over 5-7 years normally.

Scenario A is clearly better here. But flip the script: if that practice has only $40,000 in taxable income, Section 179 is capped there, and bonus depreciation on the remaining purchase cost gives them additional current-year deductions plus a usable loss carryforward.

What Qualifies (and What Catches People Off Guard)

Eligible property under bonus depreciation includes: tangible personal property with a recovery period of 20 years or less (which covers most machinery, equipment, computers, and vehicles), qualified film and television productions, certain plants bearing fruit, and qualified improvement property (think interior renovations to commercial buildings, but not the building itself).

What doesn’t qualify: buildings, land, property used outside the U.S., and property you’ve previously used. That last point has a nuance most people miss: used property qualifies for bonus depreciation as long as it’s new to your business and you didn’t acquire it from a related party. Buying a used forklift from an unrelated seller? Eligible. Buying the same forklift from your brother-in-law’s LLC? Probably not, depending on how the IRS defines the relationship.

The U.S. Small Business Administration’s tax planning resources are a decent starting point for understanding which asset categories your business likely deals with.

Vehicle limitations are also real. Luxury auto caps apply to passenger vehicles, and they limit how much you can deduct in year one regardless of what bonus depreciation math would otherwise yield. Heavy SUVs (over 6,000 lbs. GVWR) are treated differently and often more favorably. I’ve seen business owners buy a specific truck model specifically because it hits the weight threshold. No comment on whether that’s the right call, but people definitely do it.

The Congress Factor

Here’s what nobody wants to say plainly: the zero-after-2026 cliff may not happen.

Bonus depreciation’s death has been announced before. Congress has extended, modified, and reinstated depreciation provisions repeatedly over the past two decades. The research and development amortization issue that surfaced in 2022 sparked bipartisan discussions around a broader tax package that included bonus depreciation restoration. As of mid-2026, no such legislation has passed, but the conversation isn’t dead.

I don’t know whether Congress will act. Anyone who tells you they do is guessing. What I can say is: plan for the law as it currently exists, and build your timeline so that a late-year legislative surprise is a bonus, not a dependency.

If you’re making a large capital purchase decision that hinges entirely on a favorable change in law, you’re not planning, you’re gambling.

Sources

Photo: olia danilevich via Pexels

This article is for general informational purposes only and does not constitute financial, tax, or legal advice. Business finance and tax rules vary by entity type, state, and individual circumstances. Consult a qualified CPA, enrolled agent, or business attorney for advice specific to your situation.

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