Find out how you can use bonus depreciation to boost your write-offs in the first year of using qualified assets and certain leasehold improvements.
WRITTEN & RESEARCHED BY
Editor & Senior Staff Writer
Last updated onUpdated
REVIEWED BY
Finance Director
If you’re a commercial or investment property owner, you’re probably aware that depreciation can be used to lower federal income tax liabilities. You can accelerate these tax benefits in the first year with bonus depreciation, but what is bonus depreciation, and how does it work?
In this post, we’ll take a look at bonus depreciation, including what property qualifies, how to claim it, and how cost segregation and bonus depreciation work together to maximize your tax benefits.
Table of Contents
Bonus depreciation is a tax incentive that allows businesses to write off a large percentage of the cost of an asset in the first year it’s placed into service. Under current rules, 100% of the cost of qualified property can be written off in the first year it’s placed in service.
This rate is now permanently restored under current law, following the passage of the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, which reversed a multi-year phase-down that had reduced bonus depreciation to 80% in 2023, 60% in 2024, and was scheduled to fall to 40% in 2025 and 20% in 2026 before expiring.
It’s important to remember that bonus depreciation can only be claimed after the property is placed in service. If you purchase equipment in 2025 but it isn’t used in the business by the end of 2025, bonus depreciation can’t be claimed until 2026.
Property acquired after January 19, 2025, qualifies for the new permanent 100% bonus depreciation under the OBBBA. Property acquired on or before that date remains subject to the old TCJA phase-down rates. Note that for purchased property, the acquisition date is generally the date a written binding contract is executed. Contracts signed before January 20, 2025, are treated as acquired under the old phase-down rules, even if the property is placed in service at a later date.
The OBBBA also introduced a significant new category called Qualified Production Property (QPP), which allows a temporary 100% depreciation deduction for certain domestic manufacturing, production, and refining facilities — property that would not normally qualify for bonus depreciation due to its 39-year depreciation schedule.
To qualify, the property must be used as an integral part of a qualified production activity, placed in service in the United States, have construction begin after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031. Leased property does not qualify, and portions of a building used for non-production purposes, such as offices, sales, or research and development, are excluded.
Property that qualifies for bonus depreciation includes:
Prior to the TCJA, only new property that met the requirements qualified for bonus depreciation. However, used assets may also qualify under current bonus depreciation rules, provided they meet the following conditions:
To briefly sum it up, used property does not qualify if you used it before acquiring it (such as through a lease), it was acquired from a related property, or it was acquired through a tax-free transaction. If you’re unsure whether your used property qualifies for bonus depreciation, consult a tax preparer or accountant to avoid making a costly mistake on your tax return.
Cost segregation is a tax strategy used to accelerate depreciation on certain assets in commercial and investment properties. Through a cost segregation study, certain qualified assets and property improvements are identified and depreciated on an accelerated schedule of five, seven, or 15 years.
Following a cost segregation study, property owners can more easily identify assets that qualify for bonus depreciation and maximize tax benefits. While it’s possible to do your own cost segregation study, we recommend hiring one of the best cost segregation companies to complete this complex study.
Under IRS rules, bonus depreciation is automatically applied to qualified assets unless you elect out. This depreciation can be claimed by completing IRS Form 4562, Depreciation and Amortization. This form should be completed and filed with your federal tax return for the year in which the asset or assets were placed in service.
If you don’t want to claim bonus depreciation, you can also use this form to opt out of bonus depreciation. A statement must also be provided with the form.
For certain property placed in service after January 19, 2025, taxpayers may elect a reduced bonus depreciation rate (such as 40%, or 60% for long-production-period property and certain aircraft) instead of the full 100%. This can be useful for taxpayers who want to spread deductions across multiple years rather than front-loading them all in year one.
Per IRS rules, taking this election applies to all qualified property within the same property class during the same taxable year. For example, if you opt out of bonus depreciation for a five-year asset placed in service in 2025, you’re opting out of bonus depreciation for all five-year property put in service in 2025.
If you own commercial or investment property, bonus depreciation can significantly boost your tax write-offs in the first year. However, understanding what property qualifies, classifying assets, and submitting the proper form to the IRS can be confusing — and inaccuracies can be costly.
To maximize your tax benefits, we strongly recommend working with an accountant or tax expert. These professionals can help you understand bonus depreciation as well as identify other strategies specific to your unique tax situation. We also recommend working with a cost segregation company that can help identify qualified assets and help you get the most out of everything from bonus depreciation to rental property depreciation.
Want to help shape the future of the Merchant Maverick website? Join our testing and survey community!
By providing feedback on how we can improve, you can earn gift cards and get early access to new features.
Help us to improve by providing some feedback on your experience today.
The vendors that appear on this list were chosen by subject matter experts on the basis of product quality, wide usage and availability, and positive reputation.
Merchant Maverick’s ratings are editorial in nature, and are not aggregated from user reviews. Each staff reviewer at Merchant Maverick is a subject matter expert with experience researching, testing, and evaluating small business software and services. The rating of this company or service is based on the author’s expert opinion and analysis of the product, and assessed and seconded by another subject matter expert on staff before publication. Merchant Maverick’s ratings are not influenced by affiliate partnerships.
Our unbiased reviews and content are supported in part by affiliate partnerships, and we adhere to strict guidelines to preserve editorial integrity. The editorial content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.
