What Is Bonus Depreciation? Overview & How to Claim It

Bonus depreciation is one of the most impactful tax deductions available to small business owners. It allows businesses to deduct a large portion, and in some cases, the entire cost of qualifying assets in the year those assets were placed into service. When used strategically, bonus depreciation can significantly reduce taxable income and improve your business's short-term cash flow.

While bonus depreciation can be advantageous, it is often misunderstood. Recent tax law changes have reshaped how much businesses can deduct and when, creating confusion around eligibility, timing, and whether the deduction still makes sense. This can be particularly confusing for growing small businesses, where bonus depreciation should be treated as a planning decision rather than an automatic write-off.

Use this clear, practical guide to understand what bonus depreciation is, how it works, and how to claim it correctly as part of a broader tax strategy for your small business in 2026.

Key Highlights

• Bonus depreciation for small businesses allows owners to deduct a large portion of asset costs upfront, rather than spreading deductions over several years.

• Qualifying assets include equipment, machinery, software, and certain business-use vehicles.

• Recent legislation restored 100% bonus depreciation, making purchase timing critical.

• Bonus depreciation rules differ from Section 179, but many businesses can use both.

• Claiming the bonus depreciation deduction correctly requires proper documentation and tax filing.

What Is Bonus Depreciation?

Bonus depreciation is a valuable tax deduction that allows businesses to immediately expense a significant percentage of the cost of qualifying assets. Instead of depreciating an asset gradually over its useful life, bonus depreciation accelerates the deduction into the first year.

In simple terms, if your business purchases eligible equipment, software, or machinery, bonus depreciation may allow you to deduct most or all of that cost right away. This reduces taxable income and can lead to meaningful tax savings.

Under normal depreciation rules, assets are written off over multiple years. Bonus depreciation shortens that timeline by front-loading the deduction. For small businesses investing in growth and expansion, bonus depreciation can be especially valuable because it improves cash flow at a time when capital is often stretched.

How Bonus Depreciation Works

So, how does bonus depreciation work? Bonus depreciation works by changing when depreciation deductions are taken. Instead of spreading deductions over time, a business claims a large portion of the deduction in the year the asset is placed into service.

At a high level, the process looks like this:

1. Your business purchases a qualifying asset

2. The asset is placed into service during the tax year

3. Bonus depreciation is applied when filing your income tax return

4. The deduction reduces taxable income for that year

Because the deduction is taken upfront, it lowers your current-year tax liability rather than deferring savings into the future. This can free up cash for:

• Reinvestment

• Hiring

• Paying down debt

Businesses already focused on maximizing tax deductions and credits often benefit from professional guidance. This guidance ensures bonus depreciation is applied correctly and coordinated with other deductions.

What Qualifies for Bonus Depreciation

Not every business purchase qualifies for bonus depreciation. To be eligible, the asset must meet specific criteria related to property type, business use, and timing.

Common types of qualifying property include:

• Equipment and machinery

• Computers and office technology

• Business-use computer software

• Certain qualified improvement property

• Vehicles used primarily for business

To qualify, the asset must be used 50% or more for business purposes and must be placed into service during the tax year in which the deduction is claimed. Assets that are purchased but not yet operational generally do not qualify until they are actively in use.

Bonus Depreciation Percentage by Year

Bonus depreciation percentages have shifted significantly over the past few years, making the timing of asset purchases more important.

Earlier tax law included a gradual phase-down of bonus depreciation beginning in 2023, creating uncertainty for owners planning major business investments. Recent legislation reversed course, bringing clarity.

The passage of the One Big Beautiful Bill Act in 2025, due in part to certain provisions sunsetting from the Tax Cuts and Jobs Act of 2017, restored 100% bonus depreciation for qualifying assets, allowing businesses to fully expense eligible property in the year it is placed into service.

This restoration applies to bonus depreciation in 2025 and 2026. While this creates new opportunities, it also increases the need for thoughtful planning. Taking the full deduction immediately may not always be the best strategy if you anticipate increases in future income or tax rates.

Bonus Depreciation vs. Section 179

Bonus depreciation and Section 179 are often grouped together, but they are separate deductions with different rules and limitations.

Section 179 allows businesses to expense qualifying assets immediately, but it comes with an annual limit and restrictions on taxable income. Bonus depreciation does not have the same income limitations and can be claimed even if your business is currently operating at a loss.

Understanding the differences between Section 179 and bonus depreciation is essential when deciding which deduction to use and when. 

Key Differences Between Bonus Depreciation and Section 179

Understanding the key differences between bonus depreciation and Section 179 will help you decide which to use. Some of the most important differences to know include:

• Income limitations that apply to Section 179 but not to bonus depreciation

• Differences in qualified property categories

• Election rules and how each deduction is applied

Because of these differences, the right choice depends on your business’s income, cash flow, and long-term tax outlook.

Can You Use Both?

Yes, many businesses can use both Section 179 and bonus depreciation in the same tax year. The deductions are applied in a specific order, with Section 179 taken first and bonus depreciation applied to any remaining asset basis.

Using both can significantly increase deductions, but it also adds complexity, with improper coordination potentially leading to errors or missed savings. This is where strategic tax planning from 1-800Accountant becomes especially important.

How to Claim Bonus Depreciation

Claiming bonus depreciation involves more than checking a box on your tax return. It requires accurate records, proper asset classification, and the correct forms.

At a high level, the process includes:

• Tracking asset purchases and placed-in-service dates

• Determining eligibility and business-use percentages

• Completing required depreciation forms

• Reporting the deduction on the appropriate business return

Businesses that embrace strong systems for accurate asset tracking and bookkeeping are far less likely to encounter issues when filing or during an audit.

Forms Required

Bonus depreciation is claimed using Internal Revenue Service (IRS) Form 4562, Depreciation and Amortization (Including Information on Listed Property). The deduction then flows through to the appropriate business tax return based on your entity type.

The IRS provides instructions on how to report bonus depreciation along with filing details for Form 4562, which is required when claiming depreciation on business assets.

Common Mistakes to Avoid

Avoiding these common bonus depreciation mistakes helps ensure smooth tax preparation and uninterrupted operations. Common bonus depreciation mistakes to sidestep include:

• Misclassifying assets that do not qualify

• Claiming depreciation before an asset is placed into service

• Over-deducting assets used partially for personal purposes

• Failing to coordinate depreciation with other deductions

These errors can trigger IRS scrutiny or result in lost deductions, which is why many business owners choose to work with a tax professional year-round.

Is Bonus Depreciation Right for Your Business?

Bonus depreciation is powerful, but it is not always the right choice for every business. Accelerating deductions can reduce taxes today while increasing taxable income in future years.

Business owners should consider:

• Current and projected cash flow

• Expected future tax brackets

• Long-term growth and expansion plans

• Financing and lending considerations

For some businesses, spreading deductions over time creates more predictable tax outcomes. For others, immediate savings provide critical flexibility.

How Bonus Depreciation Fits Into Tax Planning

Bonus depreciation works best when it is part of a broader tax strategy. You can help avoid surprises and support long-term planning by coordinating depreciation with your:

• Entity structure

• Estimated taxes

• Financial forecasting

When paired with year-round proactive tax advisory support, depreciation decisions can be adjusted as laws and business conditions change.

Final Takeaway

Bonus depreciation allows your business to recover asset costs faster and reduce taxable income in the year of purchase. When used correctly, it can save your business thousands of dollars while improving cash flow.

However, the rules are complex, and recent tax law changes make planning more important than ever. Claiming bonus depreciation without a strategy can lead to missed opportunities or compliance issues.

Working with the experienced tax professionals at 1-800Accountant, America's leading virtual accounting firm, helps ensure bonus depreciation supports your broader financial goals while keeping your business on a solid footing.

Schedule a free 30-minute consultation to preview how much your business can save in 2026.