Bonus Depreciation 2026: 100% Permanently Restored Under the One Big Beautiful Bill Act

The OBBBA did not change which property qualifies. It restored the 100% rate for the same categories that were eligible under the TCJA. Qualifying property falls into several defined groups under 26 U.S.C. § 168(k)(2).

Tangible personal property with a MACRS recovery period of 20 years or less is the broadest category. This includes 3-year property (certain tools, manufacturing molds, tractors for over-the-road use), 5-year property (computers, vehicles, office equipment, appliances, most manufacturing equipment), 7-year property (office furniture, agricultural machinery, railroad track), 10-year property (barges, tugboats, certain food processing equipment), 15-year property (qualified improvement property, certain land improvements like fencing and sidewalks, municipal wastewater treatment plants), and 20-year property (farm buildings, municipal sewers).

Qualified improvement property (QIP) deserves special attention. QIP is any improvement to an interior portion of a nonresidential building placed in service after the building was first placed in service. It excludes enlargements, elevators, escalators, and changes to the building’s internal structural framework. QIP has a 15-year recovery period and qualifies for 100% bonus depreciation. This is the category that covers most tenant buildouts and commercial interior renovations.

Off-the-shelf computer software qualifies as 3-year property. This means commercially available software purchased or licensed for general use. Custom-developed software does not fall into this category but is typically amortized over 36 months under 26 U.S.C. § 167(f).

Used property qualifies as long as three conditions are met: (1) the taxpayer did not previously use the property, (2) the property was not acquired from a related party under Sections 267 or 707(b), and (3) the basis of the property is not determined by reference to the adjusted basis of the property in the hands of the seller (the carryover basis rule). In practice, this means arm’s-length purchases of used equipment from unrelated sellers qualify. Purchases from family members, commonly controlled entities, or property received in like-kind exchanges do not.

Qualified film, television, and live theatrical productions qualify if at least 75% of total compensation for the production is for services performed in the United States. This is relevant for our TV, film, and production clients. The deduction is claimed by the owner of the production in the year costs are paid or incurred, not necessarily the year the production is completed or distributed.

Specified plants are fruit-bearing trees and vines. The taxpayer can elect to apply bonus depreciation in the year of planting, even though the plant is not yet productive. This speeds up the deduction by years compared to waiting until the tree or vine produces fruit.

Property that does not qualify includes residential rental buildings (27.5-year property), nonresidential real property (39-year property unless covered by the new Section 168(n)), property required to use the alternative depreciation system (ADS), property used predominantly outside the United States, tax-exempt use property, and certain regulated utility property.

The acquisition-date rule is critical. The property must be acquired after January 19, 2025, to get 100% under the OBBBA. “Acquired” means the date of a binding written contract. Verbal agreements, letters of intent, and non-binding purchase orders do not establish an acquisition date. If you signed a binding contract in December 2024 for equipment delivered in June 2025, that equipment is subject to the old TCJA rate of 40%, not the OBBBA rate of 100%.

Section 168(k) bonus depreciation is permanent at 100% under the OBBBA. There is no phasedown. There is no sunset. The statute as amended does not contain an expiration date for the 100% additional first year depreciation deduction.

This is the single most important fact about the OBBBA depreciation changes, and it is widely misunderstood. Many articles written before July 2025 described a phasedown schedule of 80% (2023), 60% (2024), 40% (2025), 20% (2026), and 0% (2027 and beyond). That schedule was enacted under the TCJA in 2017. The OBBBA repealed it for property acquired after January 19, 2025.

Here is what Section 70301 of the OBBBA specifically did to the Internal Revenue Code:

• It struck the language in Section 168(k)(6) that reduced the applicable percentage by 20 percentage points each year after 2022.
• It removed the requirement that qualified property must be placed in service before January 1, 2027.
• It removed the extended deadline for long-production-period property and certain aircraft (which was January 1, 2028).
• It replaced all of the phase-down percentages with a single, permanent 100% rate for property acquired after January 19, 2025.

The confusion about 2029 comes from a different provision. The new Section 168(n) for qualified production property does have time limits: construction must begin before January 1, 2029, and the property must be placed in service before January 1, 2031. But Section 168(n) covers a narrow category of nonresidential real property used for manufacturing. It has nothing to do with the general bonus depreciation rules for equipment and personal property under Section 168(k).

Could Congress change this in the future? Of course. Congress can amend any provision of the tax code at any time. But as the law reads today, 100% bonus depreciation under Section 168(k) is permanent. A business buying equipment in 2035 will get 100% bonus depreciation under the same rules as a business buying equipment in 2026, assuming no future legislative changes.

The transitional rules also matter here. Property acquired on or before January 19, 2025, that has not yet been placed in service still follows the old TCJA phasedown. So if a company signed a binding purchase contract in October 2024 for a piece of custom-built machinery that will not be delivered until 2026, that machinery gets 20% bonus depreciation under the old rules, not 100% under the OBBBA. The acquisition date, not the placed-in-service date, determines which regime applies for property straddling the January 19, 2025, cutoff.

The IRS issued interim guidance in Notice 2026-11 clarifying these transitional rules. The notice confirms the acquisition-date test, explains how binding contracts are evaluated, and provides examples of how the old and new rates interact for property in the pipeline during the transition period.

For planning purposes, the permanence of 100% bonus depreciation removes the “use it or lose it” pressure that distorted business decisions during the phasedown years. You no longer need to rush asset purchases to beat a declining percentage. The 100% rate will be there next year, and the year after that.

Section 179 and bonus depreciation both allow first-year expensing of qualifying property, but they operate under different rules with different limitations. Understanding the differences is essential for tax planning because choosing the wrong method (or failing to coordinate both) can leave deductions on the table or create unnecessary complications.

Dollar caps. Section 179 has a ceiling. For tax year 2026, the maximum Section 179 deduction is $2,560,000. This limit phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000. If you place $6,650,000 or more of property in service, the Section 179 deduction is fully phased out. Bonus depreciation under Section 168(k) has no dollar limit and no phase-out. A company that places $20 million of qualifying equipment in service can deduct all $20 million through bonus depreciation.

Income limitation. The Section 179 deduction cannot exceed the aggregate amount of taxable income derived from the taxpayer’s active trades or businesses. If your business has $300,000 of taxable income before the Section 179 deduction, your maximum Section 179 deduction is $300,000 for that year (any excess carries forward). Bonus depreciation has no income limitation. It can create or increase a net operating loss. A startup with $500,000 of revenue and $800,000 of equipment purchases can claim $800,000 of bonus depreciation, creating a $300,000 NOL that carries forward to offset future income.

Election mechanics. Section 179 is elective. You choose which specific assets to expense on Form 4562. This gives you asset-by-asset control. Bonus depreciation is automatic. It applies to all qualifying property in a MACRS class unless you affirmatively elect out of the entire class for that tax year. You cannot cherry-pick bonus depreciation for one machine but not another in the same asset class.

Qualifying property differences. Section 179 covers tangible personal property and also extends to certain real property categories: qualified improvement property, roofs, HVAC systems, fire protection and alarm systems, and security systems for nonresidential buildings. Bonus depreciation does not apply to most of these real property categories unless they fall within a recovery period of 20 years or less (QIP at 15 years qualifies for both). Section 179 also applies to certain energy-efficient commercial building property. Bonus depreciation applies to qualified film, television, and theatrical productions, which are not eligible for Section 179.

Vehicle differences. Both have vehicle-specific rules, but they differ. Section 179 caps heavy SUVs (over 6,000 pounds GVWR but not more than 14,000 pounds) at $32,000 for 2026. Bonus depreciation has no SUV cap for vehicles over 6,000 pounds GVWR. A $95,000 heavy SUV used entirely for business gets a $32,000 Section 179 deduction or a $95,000 bonus depreciation deduction. For passenger vehicles under 6,000 pounds, Section 280F caps apply to both methods, limiting the first-year deduction to $20,300 (with bonus) or $12,400 (without bonus) for 2026.

Interaction between the two. You can claim both Section 179 and bonus depreciation on the same tax return for different assets. The IRS applies the deductions in this order: (1) Section 179 is applied first to selected assets, (2) bonus depreciation is applied to the remaining qualifying assets, (3) regular MACRS depreciation is applied to anything left. Smart planning uses Section 179 for assets that do not qualify for bonus depreciation (certain real property improvements) and lets bonus depreciation handle the rest automatically.

S corporations and partnerships. Section 179 deductions pass through to shareholders and partners but remain subject to each individual’s income limitation at the shareholder/partner level. Bonus depreciation also passes through but is not subject to an income limitation at the individual level. This can make bonus depreciation more valuable for passive investors in S corporations and partnerships who might not have enough active business income to absorb a Section 179 deduction.

Bottom line for 2026: If your total equipment purchases are under $2,560,000 and you have enough taxable income, Section 179 and bonus depreciation produce similar results for tangible personal property. Once you exceed the Section 179 cap, or if you want to generate an NOL, bonus depreciation is the only option. For real property improvements (roofs, HVAC, fire systems), Section 179 fills a gap that bonus depreciation cannot. Use both tools together.

Real estate investors do not get to deduct an entire building through bonus depreciation. That has not changed. A residential rental property depreciates over 27.5 years and a commercial property over 39 years, and both are excluded from Section 168(k). But the restoration of 100% bonus depreciation still creates enormous tax benefits for real estate through cost segregation.

How cost segregation works. A cost segregation study is an engineering-based analysis that identifies building components eligible for accelerated depreciation. When you buy a $4 million apartment building, you are not just buying a structure. You are buying carpeting (5-year property), appliances (5-year), window treatments (5-year), cabinetry (5-year or 7-year), site improvements like parking lots and sidewalks (15-year), landscaping (15-year), and specialized electrical and plumbing that serves specific equipment rather than the building as a whole (5-year or 7-year). A typical cost segregation study on a commercial building reclassifies 15% to 40% of the purchase price into these shorter-lived categories.

The math on a real deal. An investor buys a $5 million office building in 2026. Land accounts for $750,000. The depreciable basis is $4,250,000. Without cost segregation, annual depreciation is about $109,000 ($4,250,000 / 39 years). With a cost segregation study that reclassifies $1,275,000 (30% of the depreciable basis) into 5-year, 7-year, and 15-year property, the investor claims $1,275,000 of bonus depreciation in year one. The remaining $2,975,000 continues depreciating over 39 years at $76,282 per year. Total first-year depreciation: $1,351,282 instead of $109,000.

Tax savings. At a combined federal and state marginal rate of 45% (federal 37% plus New York State and City), that first-year depreciation of $1,351,282 saves roughly $608,000 in taxes. Without cost segregation, the first-year tax savings would be about $49,000. The difference: $559,000 of accelerated tax benefit in year one.

Passive activity rules still apply. Real estate rental activities are generally passive under 26 U.S.C. § 469. The depreciation deduction from cost segregation creates passive losses that can only offset passive income unless the taxpayer qualifies as a real estate professional. Real estate professionals must spend more than 750 hours per year in real property trades or businesses and must materially participate in each rental activity. For investors who do not qualify as real estate professionals, the passive losses carry forward and are released when the property is sold.

Short-term rental exception. Properties with an average rental period of 7 days or less (like Airbnb and VRBO properties) are not treated as rental activities under Temp. Reg. § 1.469-1T(e)(3)(ii)(A). If the taxpayer materially participates in the short-term rental activity, the depreciation losses are non-passive and can offset W-2 income, business income, and other non-passive income. This is why cost segregation on short-term rental properties is particularly powerful.

1031 exchanges and bonus depreciation. In a like-kind exchange under 26 U.S.C. § 1031, the exchanged basis (the carryover basis from the relinquished property) does not qualify for bonus depreciation. Only the excess basis (the additional cash or “boot” paid in the exchange) qualifies. If you exchange a property with an adjusted basis of $1 million and add $500,000 cash to acquire a replacement property worth $1.5 million, only the $500,000 of new basis is eligible for bonus depreciation through cost segregation. The $1 million of exchanged basis must continue depreciating over the remaining life from the old property.

Section 168(n) for production facilities. If the real estate is used for manufacturing, production, or refining, the new Section 168(n) allows 100% depreciation on the building structure itself, not just the cost-segregated components. This applies to factory buildings, processing plants, refineries, and similar production facilities. Construction must begin before January 1, 2029, and the property must be placed in service before January 1, 2031. A real estate investor building a $15 million manufacturing facility that meets these requirements can deduct the entire building cost in year one.

Lookback studies. Investors who purchased commercial real estate after January 19, 2025, and did not perform a cost segregation study at the time can still benefit. A “lookback” cost segregation study can be performed in any subsequent year, and the catch-up depreciation is claimed as a change in accounting method on Form 3115. No amended returns are necessary. The entire catch-up amount is deducted in the year the Form 3115 is filed.

No. California has never allowed bonus depreciation under Section 168(k), and the OBBBA did not change this. California explicitly decouples from the federal bonus depreciation rules, and the state requires a full addback of any federal bonus depreciation on the California tax return.

The California rule. Under California Revenue and Taxation Code § 24356 (for corporations) and § 17250 (for individuals), California does not conform to the additional first year depreciation deduction under IRC § 168(k). Taxpayers must add back the entire amount of federal bonus depreciation and instead depreciate the asset over its normal MACRS life for California purposes. This means an asset that is 100% expensed on the federal return in year one must be depreciated over 5, 7, 15, or however many years on the California return.

Section 179 in California. California also severely limits Section 179 expensing. The state caps the deduction at $25,000 with a phase-out beginning at $200,000 of total property placed in service. Compare this to the federal limits of $2,560,000 and $4,090,000 for 2026. A business that expenses $500,000 of equipment on its federal return using Section 179 gets a $0 Section 179 deduction on its California return (because $500,000 exceeds the $225,000 total phase-out threshold).

The practical impact. Consider a California sole proprietor who buys $400,000 of equipment in 2026 and claims 100% bonus depreciation federally. On the federal return, the $400,000 deduction reduces taxable income immediately. On the California return, the taxpayer adds back the full $400,000 of bonus depreciation and instead claims approximately $57,000 of first-year MACRS depreciation (assuming 7-year property). California taxable income is $343,000 higher than federal taxable income. At California’s top marginal rate of 13.3%, the state tax on that difference is approximately $45,600. This state tax bill comes due even though the federal deduction offset the income for federal purposes.

Temporary differences, not permanent. The California addback creates a temporary timing difference, not a permanent one. Over the asset’s full MACRS life, total depreciation on the California return equals total depreciation on the federal return. California just spreads it out over more years. In the early years, the taxpayer pays more California tax than they would if the state conformed. In later years, the California depreciation deductions continue even after the asset is fully depreciated for federal purposes, creating California-only deductions that reduce state taxable income.

New York. New York is similar but not identical. New York decouples from federal bonus depreciation and requires a full addback. However, New York allows its own additional first-year depreciation deduction of up to $25,000 for qualifying property under Tax Law § 606(a)(6). This is a small consolation compared to the federal 100% rate, but it is more than California offers.

Other non-conforming states. As of 2026, the following states either fully or partially decouple from federal bonus depreciation: California, New York, New Jersey, Pennsylvania, Maryland, Connecticut, Hawaii, Maine, Vermont, Virginia, and several others. The rules change frequently as states update their IRC conformity dates and enact specific decoupling provisions in response to the OBBBA. Georgia, for example, conformed to the IRC as of March 2024 and has not yet updated to include the OBBBA changes.

Multi-state businesses. A business operating in five states with different conformity rules must maintain up to five different depreciation schedules, one for each state. This is not optional. Each non-conforming state requires its own addback adjustment on the state return. The federal depreciation is reported on the federal return, and each state’s version of the depreciation is reported on that state’s return. This creates tracking complexity that grows with every asset purchase and every state filing.

Planning for California businesses. If you are based in California, the federal bonus depreciation still reduces your federal tax bill. The state conformity issue only affects the California portion. For a taxpayer in the 37% federal bracket and 13.3% California bracket, a $200,000 equipment purchase saves $74,000 in federal taxes immediately (from 100% bonus depreciation) but only saves about $3,325 in California taxes in year one (from normal first-year MACRS depreciation). The net year-one tax benefit is still substantial. Do not avoid equipment purchases because of California’s decoupling. Just budget for the state tax timing difference.