# Bonus Depreciation for Equipment Canonical URL: https://fundmyequipment.com/learn/bonus-depreciation-equipment/ Last modified: 2026-05-29T19:39:17+00:00 Type: efin_guide ## Summary Bonus Depreciation for Equipment. Comprehensive guide covering the topic in depth, with worked examples, current data, and cross-references. ## Content Bonus depreciation is an additional first-year deduction available on top of Section 179. Authorized under IRC §168(k), it currently allows 40% additional deduction in 2025 (declining through 2027 under current law). How it works Bonus depreciation applies to qualifying property after Section 179 is exhausted. The calculation: Equipment cost minus Section 179 deduction = remaining basis Remaining basis × bonus percentage = bonus deduction Basis after bonus depreciation is subject to MACRS Bonus depreciation phase-down Year placed in serviceBonus % 2017 (after Sept 27)100% 2018-2022100% 202380% 202460% 202540% 202620% 2027 and beyond0% (under current law) Congress could extend or restore higher bonus depreciation. Check current law before planning multi-year strategies. What qualifies Qualifying property includes: Tangible personal property with recovery period of 20 years or less Computer software (off-the-shelf, depreciated) Qualified Improvement Property Certain plants bearing fruits and nuts Film, television, and theatrical productions (specific rules) Used property qualifies (as long as new to you and not acquired from related party). What does NOT qualify Property used 50% or less for business Real property with recovery period over 20 years (buildings) Land Inventory Property acquired in a like-kind exchange Property received as gift or inheritance Key differences from Section 179 FeatureSection 179Bonus depreciation 2025 limit$1,250,00040% of basis, no dollar cap Income limitationCannot exceed taxable incomeCan create NOL ElectionOptional per propertyDefault applies to qualifying property unless opted out CarryforwardUnused carries forwardCreates NOL that carries forward Phase-outAt $3.13M purchasesNone Worked example $300,000 equipment purchase in 2025. Section 179 fully used. Section 179: $300,000? No, depends on taxable income Suppose taxable income $200,000, so Section 179 = $200,000 Remaining basis: $100,000 Bonus depreciation: $100,000 × 40% = $40,000 Remaining basis: $60,000 Year 1 MACRS (5-year): $60,000 × 20% = $12,000 Total year 1 deduction: $200K + $40K + $12K = $252,000 Net loss after deduction: $200K - $252K = -$52,000 (NOL carries forward) Electing out of bonus depreciation You can elect out of bonus depreciation on a class-by-class basis. Reasons to elect out: You want to preserve future-year deductions State conformity issues penalize bonus depreciation You prefer MACRS smoothing You want to avoid creating a net operating loss Election made by attaching statement to tax return. State conformity Many states do not conform to federal bonus depreciation: Some states decouple entirely (no bonus depreciation for state tax) Some states allow 50% bonus or other percentages Some states require add-back over multiple years States with bonus depreciation decoupling include New York, New Jersey, California, Pennsylvania, North Carolina, and others. Talk to your CPA. Like-kind exchange interaction The Tax Cuts and Jobs Act eliminated like-kind exchanges for personal property in 2018. Equipment cannot be exchanged tax-free. The full sale price of traded equipment is recognized as gain, and the new equipment's basis is its purchase price (not net of trade). This means more equipment cost is eligible for bonus depreciation in trade-in scenarios than under prior law. Section 179 vs bonus depreciation strategy Decision factors: Income limitation: If Section 179 would exceed taxable income, use bonus instead (which can create NOL) Total cost: If above Section 179 limit, use bonus on excess Multi-year planning: If next year's income will be higher, defer some current-year deductions State conformity: If state penalizes bonus, lean Section 179 For deep dive, see Section 179 vs bonus depreciation strategy. Common mistakes Forgetting bonus depreciation is automatic unless opted out Not optimizing the Section 179 + bonus stacking order Missing state conformity differences Failing to track different federal and state depreciation schedules Buying equipment you do not need just to chase the deduction Action steps Project current-year taxable income Plan Section 179 election based on income limit Calculate bonus on remaining basis Confirm state conformity implications Track placed-in-service date carefully Document on Form 4562