What Is Bonus Depreciation? Eligibility Rules and How to Claim It

Lowering taxable income can make a significant difference for businesses, especially when buying expensive equipment or property. One IRS-approved method is bonus depreciation, which allows you to take a larger deduction in the first year rather than spreading it out over time.

This approach can improve cash flow, reduce current tax liability, and help offset the cost of new assets. However, bonus depreciation rules have changed for 2025 and beyond, including reduced percentages and updated eligibility criteria.

Read on to understand how bonus depreciation works, what assets qualify, the new phase-out schedule, and the steps needed to claim it the right way.

📌 Also Read: How State and Local Taxes Affect Your Investment Returns

What Is Bonus Depreciation?

Most business assets lose value as they are used. Normally, this loss — known as depreciation — is deducted gradually over the asset’s useful life.

Bonus depreciation lets you deduct a larger portion of that cost upfront in the first year the asset is placed in service. Because of recent law changes, starting in 2025, the maximum first-year deduction is 40% for property with a 20-year or shorter MACRS life.

✏️ Hypothetical Example:

📝 Note: The Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation to include certain used property and short‑lived assets identified through a cost segregation study, helping business owners take larger deductions sooner.

What Are the Benefits of Claiming Bonus Depreciation?

✅ Reduces taxable income in the year the asset is placed in service

✅ Improves cash flow by increasing available capital

✅  Can help offset income from other sources in the same tax year

✏️ Hypothetical Example:

A business purchases qualifying equipment for $100,000 in 2025. With the 40% bonus depreciation rate, it can deduct $40,000 in the first year. That deduction directly reduces taxable income by $40,000 for that tax year, which may lower the overall tax owed.

📌 Also Read: Tax Deductions vs Tax Credits: Key Differences & Similarities

How to Claim Bonus Depreciation

While depreciation is required for eligible assets, bonus depreciation is optional. Here’s how to claim it correctly:

Step 1: Determine Eligibility

Assets must generally have a useful life of 20 years or less and include items such as:

Step 2: Know the Current Depreciation Rate

The bonus depreciation rate is 40% for property placed in service in 2025, 20% in 2026, and is currently scheduled to phase out to 0% after 2026 (with limited exceptions).

Step 3: Place the Property in Service

To claim bonus depreciation, the property must be placed in service during the tax year for which you are filing. “Placed in service” means that the property is ready and available for business use.

✏️ Hypothetical Example: If you purchased equipment in February 2025 but do not begin using it until July 2025, the “placed in service” date is July 2025.

Step 4: Calculate the Depreciation

Calculate the depreciation amount based on the cost of the asset and the applicable bonus depreciation percentage. 

✏️ Hypothetical Example: Equipment purchased for $10,000 in 2025 would qualify for a $4,000 deduction (40% × $10,000).

Step 5: Complete IRS Form 4562

Typically, bonus depreciations are reported on IRS Form 4562. This form is used to claim your deduction for depreciation and amortization, make the election under Section 179 to expense certain property, and provide information on the business/investment use of cars and other listed property. Submit Form 4562 along with your business tax return.

Step 6: Keep Accurate Records

Keep detailed records of the purchase date, cost, and use of the property. These records are essential for supporting your claim if the IRS has any questions or if you are audited.

What Assets Qualify for Bonus Depreciation?

Here are some of the assets that qualify for bonus depreciation:

📝 Important Note: The residential rental property itself does not qualify for bonus depreciation because residential rental property has a recovery period of 27.5 years, which exceeds the 20‑year eligibility limit.

Can Software Qualify for Bonus Depreciation?

Yes, if the software:

✅ Is available for public purchase

✅ Is under a nonexclusive license

✅ Has not been substantially modified

Can Used Assets Qualify for Bonus Depreciation?

Yes, used assets can qualify if:

✅ You didn’t use the asset before purchasing it

✅ You didn’t buy it from a related party

✅ It wasn’t acquired through a tax-free transaction

Can Vehicles Qualify for Bonus Depreciation?

Yes, but the deduction depends on the vehicle’s weight and business use:

✅ Vehicles under 6,000 pounds: Bonus depreciation is capped at $8,000 in the first year.

✅ Vehicles over 6,000 pounds: If used more than 50% for business purposes, 40% of the cost may be deductible in 2025.

📌 Also Read: Standard Deduction vs Itemized Deduction: Which One’s Better?

Staying Ahead with Bonus Depreciation Rules

Bonus depreciation can be a valuable tool for lowering taxable income, but the percentage available has decreased for 2025 and will continue to phase down. Businesses should plan purchases carefully, confirm eligibility, and maintain proper documentation to avoid compliance issues.

📌 For more tax strategies and updated information, check out our other articles on deductions and business planning:

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