100% bonus depreciation returns under the new 2026 tax law

The restoration of 100% bonus depreciation under the new 2026 tax legislation marks a significant shift in federal tax policy, creating immediate opportunities for business owners seeking to reduce their tax burden. After years of phased-down under the original Tax Cuts and Jobs Act provisions, Congress has reinstated full first-year expensing for qualifying business assets, providing substantial tax relief for companies making capital investments.

This legislative change allows businesses to immediately deduct the full cost of qualifying property placed in service in 2026 or later, rather than spreading deductions over multiple years under standard depreciation schedules. Understanding how to leverage this restored benefit, along with strategies such as Depreciation and amortization planning, can generate significant tax savings for businesses of all sizes.

The timing of this restoration creates unique planning opportunities for businesses that delayed major equipment purchases during the phasedown period. Companies can now accelerate their investment timelines and capture immediate tax benefits that were unavailable at the reduced bonus depreciation rates of recent years.

What the new 2026 bonus depreciation law changes

The new 2026 tax legislation reverses the scheduled phasedown that had reduced bonus depreciation from 100% in 2022 to 20% under the original TCJA timeline. This restoration applies to qualified property acquired and placed in service after the effective date of the new law, providing immediate relief for businesses planning capital expenditures.

Under the restored provisions, businesses can deduct 100% of the cost of qualifying assets in the year they are placed in service, eliminating the need to track partial bonus percentages and complex transition rules. This simplification reduces administrative burden while maximizing tax benefits for S Corporations and other business entities making significant investments.

The legislation maintains the expanded definition of qualified property that was established under TCJA, including both new and used property acquisitions. This broader eligibility continues to benefit businesses that acquire pre-owned equipment and machinery, providing the same immediate deduction available for new purchases.

Key changes under the new 2026 bonus depreciation law include:

1. Restoration of 100% first-year deduction for all qualifying property
2. Continuation of the used property eligibility established under TCJA
3. Extension of qualified improvement property bonus depreciation treatment
4. Maintenance of the 20-year recovery period for qualified improvement property
5. Preservation of election options for taxpayers preferring standard depreciation

The new law also addresses technical corrections related to qualified improvement property that had created confusion in earlier tax years. These clarifications ensure consistent treatment for interior improvements to nonresidential buildings, maximizing deduction opportunities for retail, restaurant, and commercial property owners.

Qualifying property and eligibility requirements

The 100% bonus depreciation applies to tangible property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System. This encompasses most business equipment, machinery, and vehicles, as well as specific building improvements that businesses typically acquire for operational purposes.

Qualifying property must be placed in service during the tax year to claim the bonus depreciation deduction. The placed-in-service date is the date on which the property is ready and available for its intended use, regardless of when the business actually begins using the asset. This timing distinction can affect year-end planning for businesses that acquire equipment late in the tax year.

C Corporations and pass-through entities both benefit from the restored bonus depreciation, though the deduction flows through differently depending on entity structure. Pass-through entities pass the depreciation deduction to their owners, while C Corporations claim the deduction directly against corporate income.

Eligible property categories for 100% bonus depreciation encompass:

• Manufacturing equipment and industrial machinery with recovery periods up to 20 years
• Computer systems, software, and technology infrastructure
• Office furniture, fixtures, and business equipment
• Qualified improvement property for nonresidential building interiors
• Certain vehicles used primarily for business purposes

The acquisition requirements specify that the taxpayer must not have used the property before acquiring it, though this restriction applies to the specific taxpayer rather than the property itself. Businesses can claim bonus depreciation on used equipment purchased from unrelated parties, expanding opportunities for cost-effective capital investments.

Certain property types remain ineligible for bonus depreciation, including property used predominantly outside the United States, property used by tax-exempt organizations, and property subject to specific lease arrangements. Understanding these exclusions helps businesses identify qualifying assets and maximize their depreciation benefits through proper planning with strategies like Vehicle expenses deductions.

Strategic timing for maximum tax benefit

Restoring 100% bonus depreciation creates compelling incentives for businesses to accelerate capital investments and realize immediate tax savings. Companies that postponed equipment purchases during the phasedown period can now proceed with acquisition plans and receive full first-year deductions on qualifying property.

Timing considerations extend beyond simple year-end purchasing decisions to encompass multi-year capital planning strategies. Businesses should evaluate projected income levels, anticipated equipment needs, and overall tax position when determining the optimal timing for major asset acquisitions under the restored bonus depreciation rules.

The interaction between bonus depreciation and other deduction strategies requires careful analysis to maximize overall tax benefits. Home office deductions and other business expense claims work alongside bonus depreciation to reduce taxable income, but the sequencing and combination of these strategies can affect total tax savings.

Strategic timing factors to consider include:

1. Current year income projections and expected tax bracket positioning
2. Anticipated business growth and future income expectations
3. Cash flow requirements and financing availability for asset purchases
4. State tax implications of accelerated federal depreciation deductions
5. Potential alternative minimum tax considerations for certain taxpayers

Businesses with fluctuating income may benefit from timing asset purchases to coincide with high-income years, when the immediate deduction provides the maximum tax benefit at the applicable marginal rate. This approach concentrates deductions in periods when they offset income taxed at higher marginal rates.

The election to opt out of bonus depreciation remains available for taxpayers who prefer to spread deductions over the asset's recovery period. This election may benefit businesses expecting significantly higher income in future years or those managing net operating loss carryforwards and other tax attributes.

Coordination with Section 179 expensing

The restored 100% bonus depreciation works alongside Section 179 expensing to provide multiple pathways for immediate asset deductions. Understanding the differences between these provisions helps businesses select the optimal approach for their specific situations and maximize available tax benefits.

Section 179 allows businesses to deduct up to $1,220,000 in qualifying property costs in 2026, subject to a phase-out threshold at which total qualifying property costs exceed $3,050,000. This limitation makes Section 179 most beneficial for smaller businesses with moderate capital investment levels, while bonus depreciation provides unlimited immediate deductions regardless of investment amount.

Travel expenses and other business deductions, combined with depreciation strategies, create comprehensive tax-reduction plans. The ordering of these deductions affects taxable income calculations and may influence the optimal mix of Section 179 and bonus depreciation for specific taxpayers.

A comparison of Section 179 and bonus depreciation reveals essential distinctions:

• Section 179 imposes an annual deduction limit of $1,220,000 for 2026, with a phaseout threshold beginning at $3,050,000 in total qualifying property, while bonus depreciation has no yearly limit or phaseout threshold
• Both provisions allow deductions for the acquisition of used property
• The most significant difference concerns income limitations where Section 179 deductions cannot exceed business income for the year, whereas bonus depreciation can create or increase net operating losses
• State tax conformity varies widely for both provisions, requiring careful analysis of applicable state rules

The ability of bonus depreciation to create or increase net operating losses distinguishes it from Section 179, which cannot reduce taxable income below zero. Businesses anticipating losses may prefer bonus depreciation to generate NOL carryforwards for future tax years.

Many businesses benefit from claiming Section 179 on selected assets first, then applying bonus depreciation to the remaining qualified property. This layered approach provides flexibility in managing deductions across multiple tax years while capturing immediate benefits from both provisions.

Industry applications and real-world examples

The restoration of 100% bonus depreciation creates significant opportunities across industries, particularly for capital-intensive businesses that rely on equipment, machinery, and technology investments. Understanding industry-specific applications helps business owners identify relevant opportunities within their operations.

Manufacturing companies benefit substantially from bonus depreciation on production equipment, assembly line machinery, and specialized tools. A manufacturing business that acquires $2 million in new production equipment can immediately deduct the entire cost, potentially saving over $500,000 in federal taxes, depending on its tax bracket and entity structure.

Meals deductions and other business expense strategies complement bonus depreciation for restaurant and hospitality businesses making qualified improvement property investments. Interior renovations, kitchen equipment, and technology systems all qualify for immediate expensing under the restored provisions.

Industry-specific bonus depreciation applications include:

1. Construction companies are acquiring heavy equipment, vehicles, and specialized machinery
2. Healthcare practices are investing in medical equipment and diagnostic technology
3. Professional services firms are purchasing computer systems and office infrastructure
4. Retail businesses are making qualified improvement investments in store locations
5. Transportation companies are expanding vehicle fleets and logistics equipment

Real estate investors utilizing cost segregation studies can identify personal property components within building acquisitions that qualify for bonus depreciation. This strategy accelerates deductions for items such as carpeting, specialized lighting, and specific building systems that meet the recovery period requirements.

The Oil and gas deduction provisions work alongside bonus depreciation for energy sector investments, creating layered tax benefits for businesses involved in extraction, production, and related activities.

Documentation and compliance requirements

Proper documentation supports bonus depreciation claims and protects businesses during potential IRS examinations. Maintaining comprehensive records of asset acquisitions, placed-in-service dates, and cost allocations ensures compliance with tax code requirements and substantiation standards.

The placed-in-service date documentation requires evidence that the asset was ready and available for use during the tax year claimed. This may include delivery receipts, installation completion records, operational testing documentation, and contemporaneous business records showing when equipment became functional.

Cost basis documentation must establish the amount paid or incurred for qualifying property, including purchase price, sales tax, delivery charges, and installation costs. These records support the depreciation calculation and demonstrate the accuracy of claimed deductions.

Essential documentation for bonus depreciation claims includes:

• Purchase invoices and contracts showing acquisition costs and dates
• Delivery receipts and installation completion certificates
• Asset registers with detailed property descriptions and classifications
• Depreciation schedules showing calculations and elections made
• Records of any trade-ins, exchanges, or financing arrangements

Partnership entities must allocate bonus depreciation deductions among partners in accordance with the partnership agreement and applicable tax rules. Proper documentation of these allocations supports partner-level reporting and ensures consistent treatment across the partnership.

The election to opt out of bonus depreciation must be made on a timely filed return and applies to all property within the same class placed in service during the tax year. Once created, this election is generally irrevocable without IRS consent, making careful planning essential before filing.

State tax considerations and planning

State tax treatment of bonus depreciation varies significantly across jurisdictions, creating planning opportunities and potential complications for businesses operating in multiple states. Understanding state conformity rules helps businesses accurately calculate state tax liabilities and identify optimization strategies.

Some states fully conform to federal bonus depreciation provisions, allowing the same immediate deductions for state income tax purposes. Other states decouple from federal bonus depreciation entirely, requiring businesses to use standard depreciation methods for state tax calculations regardless of federal elections.

Late S Corporation elections may affect state tax treatment of pass-through depreciation deductions, particularly in states with different conformity dates or entity-level taxes. Businesses changing entity classification should consider state depreciation implications as part of their planning process.

State conformity categories for bonus depreciation include:

1. Full conformity states that allow 100% bonus depreciation matching federal treatment
2. Partial conformity states that limit bonus percentages or impose add-back requirements
3. Non-conformity states require standard depreciation for all state tax calculations
4. Rolling conformity states that it automatically adopts federal changes
5. Static conformity states are fixed to specific Internal Revenue Code versions

Multi-state businesses may face different depreciation calculations for each state where they file returns, requiring careful tracking of federal and state basis differences. These variations can create significant administrative complexity and may affect location decisions for major asset acquisitions.

Planning for state tax implications should occur before major acquisitions, allowing businesses to structure purchases to optimize both federal and state tax benefits where possible.

Maximize your depreciation benefits with Instead

The restoration of 100% bonus depreciation creates unprecedented opportunities for businesses to reduce their tax burden through strategic capital investments and proper planning. Taking full advantage of these provisions requires understanding the qualification rules, timing considerations, and documentation requirements that support legitimate deductions.

Instead's comprehensive tax platform simplifies bonus depreciation planning by automatically identifying qualifying assets and calculating maximum available deductions based on your specific business situation and entity structure.

Our intelligent system integrates depreciation strategies with your broader tax planning to help you capture every available tax savings opportunity while maintaining compliance with federal and state requirements.

Transform your capital investment strategy into meaningful tax reductions with advanced tax reporting capabilities and expert guidance. Explore our flexible pricing plans designed to maximize your depreciation benefits and overall tax efficiency.

Frequently asked questions

Q: What types of property qualify for 100% bonus depreciation under the new 2026 law?

A: Qualifying property includes tangible assets with recovery periods of 20 years or less under MACRS, such as manufacturing equipment, computer systems, office furniture, business vehicles, and qualified improvement property for nonresidential buildings. Both new and used property qualify, provided the taxpayer has not previously used the specific asset.

Q: Can bonus depreciation create a net operating loss for my business?

A: Yes, unlike Section 179 expensing, bonus depreciation can create or increase a net operating loss. This allows businesses to generate NOL carryforwards that offset taxable income in future years, providing flexibility in managing tax liabilities across multiple periods.

Q: How does the new bonus depreciation interact with Section 179 expensing?

A: Businesses can use both provisions on different assets or apply them sequentially to the exact property. Section 179 has an annual limit and cannot exceed business income, whereas bonus depreciation is unlimited and can generate losses. Many businesses claim Section 179 on selected assets first, then apply bonus depreciation to the remaining qualified property.

Q: Do all states allow 100% bonus depreciation for state income tax purposes?

A: No, state conformity varies significantly. Some states fully conform to federal bonus depreciation, while others decouple entirely or impose limitations. Businesses should review the specific state rules for filing returns to calculate state tax liabilities and plan accordingly.

Q: What documentation do I need to support bonus depreciation claims?

A: Essential documentation includes purchase invoices showing acquisition costs, delivery receipts establishing placed-in-service dates, asset registers with property descriptions and classifications, depreciation schedules showing calculations, and records of any financing arrangements or trade-ins related to the acquisition.

Q: Can I elect out of bonus depreciation if standard depreciation benefits my situation?

A: Yes, taxpayers can elect to opt out of bonus depreciation on a class-by-class basis. This election must be made on a timely filed return and applies to all property within the same class placed in service during the tax year. The election is generally irrevocable without IRS consent.

Q: How does bonus depreciation affect my basis in the property?

A: Bonus depreciation reduces your adjusted basis in the property by the amount of depreciation claimed. This affects gain or loss calculations if you later sell or dispose of the asset. The reduced basis also impacts any remaining depreciation deductions if you elected partial bonus depreciation under prior law provisions.