The One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation for qualifying business property acquired and placed in service after January 19, 2025, eliminating the phase-down schedule that had reduced the deduction to 60% in 2024 and was on track to reach 20% in 2026 and zero in 2027. The change, confirmed by IRS Notice 2026-11 issued in January, allows businesses to immediately deduct the full cost of qualifying equipment, machinery, vehicles, computers, and furniture with no annual dollar cap, fundamentally altering the capital expenditure calculus for entrepreneurs, small business owners, and mid-market companies across every industry.
Key Takeaways
- 100% bonus depreciation under Section 168(k) is now permanent for qualifying property acquired and placed in service after January 19, 2025, with no scheduled phase-down.
- Bonus depreciation has no annual dollar cap and can be used to create a net operating loss, unlike Section 179, which is capped at $2.56 million for 2026 and limited to taxable business income.
- Qualifying property includes both new and used tangible depreciable assets with a recovery period of 20 years or less under MACRS: machinery, equipment, vehicles, computers, furniture, and certain qualified improvement property.
- A new Section 168(n) provision allows 100% expensing of nonresidential real property used in manufacturing or production, with construction beginning between January 19, 2025 and December 31, 2028.
- A C-corporation in the 21% federal bracket purchasing $1 million in qualifying equipment can realize $210,000 in first-year tax savings under full bonus depreciation, compared to $42,000 under standard MACRS depreciation alone.
The TCJA Phase-Down Is Gone and Full Expensing Has No Expiration Date
Under the Tax Cuts and Jobs Act of 2017, 100% bonus depreciation was available for assets acquired and placed in service between September 27, 2017 and December 31, 2022. After that, the deduction was scheduled to decline by 20 percentage points per year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero beginning in 2027. That predictable decline created a recurring planning headache for business owners, who had to time equipment purchases around shifting depreciation percentages and lobby annually for extensions that might or might not come.
The OBBBA eliminated that cycle entirely. Section 70301 of the law amended IRC Section 168(k) to restore the 100% additional first-year depreciation allowance with no sunset provision. The trigger is the acquisition date, not the placed-in-service date. Property acquired under a written binding contract that was in effect before January 20, 2025 remains on the old TCJA phase-down schedule, but anything purchased after that cutoff qualifies for the full deduction. The permanence means that a business owner purchasing equipment in 2026 and another purchasing equivalent equipment in 2032 face the same depreciation rules, a level of predictability that the tax code has rarely offered for capital investment incentives.
How Bonus Depreciation and Section 179 Work Together in 2026
Entrepreneurs now have two primary tools for first-year expensing, and understanding how they interact determines the optimal strategy. Bonus depreciation under Section 168(k) has no annual dollar limit. A business can deduct $50,000 or $5 million of qualifying equipment in a single year. It also has no taxable income limitation, meaning it can be used to generate a net operating loss that carries forward to offset income in future years. That flexibility makes bonus depreciation the more powerful tool for businesses making large capital investments or operating in years with thin margins.
Section 179 expensing operates differently. The OBBBA raised the annual deduction limit, and for 2026 the IRS has set it at $2.56 million per Revenue Procedure 2025-32, with the phase-out threshold beginning at approximately $3.63 million in total qualifying property placed in service during the year. Both amounts are now indexed for inflation. However, Section 179 deductions cannot exceed the business’s taxable income for the year, which means they cannot create a net operating loss. Where Section 179 holds a distinct advantage is in its coverage of certain property types that do not qualify for bonus depreciation, including roofs, HVAC systems, fire protection equipment, and security systems in nonresidential buildings. Many states that have decoupled from federal bonus depreciation still conform to Section 179, making it the more reliable deduction for businesses operating across multiple states.
In practice, most tax professionals recommend applying Section 179 first to the assets it covers most advantageously, particularly those ineligible for bonus depreciation, and then using bonus depreciation for the remaining qualifying property without regard to dollar limits or income constraints.
The First-Year Cash Flow Impact Is Substantial
The financial difference between full first-year expensing and standard MACRS depreciation is not marginal. A profitable C-corporation in the 21% federal tax bracket purchasing $1 million in qualifying five-year MACRS property illustrates the gap. Under 100% bonus depreciation, the entire $1 million is deductible in year one, producing $210,000 in federal tax savings immediately. Under standard MACRS depreciation without bonus, the first-year deduction on five-year property is approximately 20% of the cost, or $200,000, yielding $42,000 in tax savings. The $168,000 difference represents capital available for reinvestment, debt reduction, hiring, or operational needs in the year the purchase is made rather than being recovered incrementally over three to seven years.
For pass-through entities, including sole proprietorships, S-corporations, partnerships, and LLCs taxed as partnerships, the benefit flows directly to the owner’s individual return. Combined with the permanent 23% QBI deduction under Section 199A, the effective tax rate on pass-through business income has decreased meaningfully in 2026. SBE Council polling found that 61% of small business owners reported positive cash-flow effects from the combined tax provisions in 2025, and 73% anticipate continued positive impact in 2026 and beyond.
New Section 168(n) Extends Full Expensing to Manufacturing Buildings
Beyond restoring bonus depreciation for equipment and machinery, the OBBBA introduced an entirely new provision that may prove equally consequential for capital-intensive businesses. Section 168(n) allows 100% first-year expensing for qualifying nonresidential real property used in manufacturing, production, or refining of tangible goods within the United States. Under prior law, nonresidential real property was depreciated over 39 years using the straight-line method, meaning a manufacturer constructing a $10 million production facility would recover the cost over nearly four decades.
Under Section 168(n), that same facility can be fully expensed in the year it is placed in service, provided construction begins between January 19, 2025 and December 31, 2028, and the building is placed in service before January 1, 2033. The provision is explicitly designed to incentivize domestic manufacturing investment, and because it is not available for foreign property, it creates a structural tax advantage for companies that locate production facilities in the United States rather than offshore.
State Conformity Remains the Major Variable
The federal rules are now clear and permanent, but state treatment of bonus depreciation varies widely and changes frequently. Not all states conform to federal bonus depreciation under Section 168(k). Some states decouple entirely, requiring businesses to add back the federal bonus depreciation deduction and instead claim depreciation under the state’s own schedule. Others partially conform or impose their own caps. The result is that a business claiming full 100% bonus depreciation on its federal return may face a significantly different depreciation schedule on its state return, creating additional compliance complexity and potentially reducing the net benefit of the federal deduction.
Tax advisors are recommending that business owners review state conformity status annually, particularly in states with active legislatures that may adjust their treatment of OBBBA provisions in upcoming sessions. For businesses operating in multiple states, the interplay between federal bonus depreciation, Section 179 deductions, and varying state rules requires coordinated modeling to ensure the optimal combination of deductions across all jurisdictions.
FAQs
What Property Qualifies for 100% Bonus Depreciation in 2026?
Qualifying property includes tangible depreciable assets with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System. This covers machinery, equipment, vehicles, computers, furniture, off-the-shelf computer software, and certain qualified improvement property such as interior improvements to nonresidential buildings. Both new and used assets qualify, provided the used property is new to the taxpayer and meets the acquisition requirements. The property must be both acquired and placed in service after January 19, 2025.
Can Bonus Depreciation Create a Business Loss?
Yes. Unlike Section 179 expensing, which is limited to the business’s taxable income for the year, bonus depreciation under Section 168(k) has no income limitation. If the depreciation deduction exceeds business income, it creates a net operating loss that can be carried forward to offset taxable income in future years. This makes bonus depreciation particularly valuable for businesses making large capital investments during periods of lower revenue.
Does Every State Follow the Federal 100% Bonus Depreciation Rule?
No. State conformity to federal bonus depreciation varies. Some states fully conform to Section 168(k) and allow the same 100% deduction. Others decouple and require businesses to use the state’s own depreciation schedule, which may spread the deduction over multiple years. Some states partially conform or impose caps. Businesses should verify their state’s current conformity status with a tax advisor, as state legislatures may update their treatment of OBBBA provisions during upcoming sessions.
