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How to Claim Bonus Depreciation

How to Claim Bonus Depreciation. Comprehensive guide.

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Bonus depreciation is claimed on IRS Form 4562 alongside Section 179 and MACRS. Unlike Section 179, bonus depreciation applies automatically to qualifying property unless you elect out.

How bonus depreciation works on the return

Bonus depreciation appears on Form 4562 Part II (“Special Depreciation Allowance”). The mechanics:

  1. Determine equipment basis (cost minus Section 179 if any)
  2. Apply bonus percentage (40% in 2025)
  3. Result is bonus depreciation deduction
  4. Remaining basis after bonus is subject to MACRS

2025 bonus percentage

40% in 2025. Phasing down 20% per year:

  • 2025: 40%
  • 2026: 20%
  • 2027: 0% (under current law)

Congress could change this. Confirm current law at filing.

Qualifying property

Same property categories as Section 179:

  • Tangible personal property with recovery period of 20 years or less
  • Computer software
  • Qualified Improvement Property
  • Certain plants bearing fruits and nuts

Used property qualifies (since 2018) as long as new to you.

Election out

You can elect out of bonus depreciation on a class-by-class basis. Reasons to opt out:

  • State tax conformity issues
  • Multi-year tax planning
  • Avoiding creating excess deductions
  • Maintaining basis for future planning

Election is made by attaching a statement to your tax return for the year. The statement identifies the property class for which bonus is waived.

Per-class election

Bonus depreciation election out is by MACRS class (5-year property, 7-year property, etc.), not per-property. Either all qualifying property in a class gets bonus, or none does (within the elected-out class for that return).

To elect out:

  1. Decide which class to opt out of
  2. Attach written statement to the timely-filed return
  3. Statement should reference IRC §168(k)(7) and identify class
  4. Election is irrevocable once made for the year

Stacking with Section 179

Section 179 applies first, then bonus depreciation on remaining basis:

  1. Calculate Section 179 election (up to limit and income)
  2. Subtract from equipment basis
  3. Apply bonus percentage to remainder
  4. Subtract bonus from remaining basis
  5. Apply MACRS to final remaining basis

Worked example

$400,000 equipment placed in service 2025. Taxable income $300,000.

  • Section 179 maximum: $300,000 (limited by income)
  • Remaining basis: $100,000
  • Bonus depreciation (40%): $40,000
  • Remaining basis: $60,000
  • Year 1 MACRS (5-year): $60,000 × 20% = $12,000
  • Total year 1 deduction: $352,000
  • Net taxable income: $300K – $352K = -$52K (NOL)

NOL implications

Bonus depreciation can create a net operating loss. The NOL carries forward indefinitely:

  • Apply against future taxable income
  • Track NOL carryforward on Form 1045 or 1138
  • NOL deductions limited to 80% of taxable income (post-2017 NOLs)

This is different from Section 179, which cannot exceed taxable income in the year claimed.

State conformity issues

Many states do not conform to federal bonus depreciation:

  • Some states decouple entirely
  • Some states allow partial bonus
  • Some states require add-back over multiple years

Track separate federal and state depreciation schedules where applicable. Your CPA handles this.

Form 4562 documentation

Required information:

  • Equipment description
  • Date placed in service
  • Cost or other basis
  • Bonus depreciation deduction
  • Election-out statement if applicable

Common questions

Can I take bonus depreciation without Section 179? Yes. Bonus depreciation can be claimed regardless of Section 179 election.

What if I do not file an election out and I want one? The default is to apply bonus. To opt out, you must affirmatively elect out on a timely-filed return.

Can I amend a return to change my Section 179 / bonus election? Section 179 elections can be amended within statutory time limits. Bonus depreciation election-out cannot be revoked once made.

How does bonus apply to used equipment? Used equipment qualifies as long as new to you and not acquired from a related party.

Common mistakes

  • Forgetting bonus is automatic; thinking it has to be elected
  • Missing the opt-out timing if needed
  • Not tracking NOL carryforward properly
  • State conformity errors
  • Not coordinating with Section 179 strategy

Action steps

  1. Identify all qualifying equipment placed in service during the year
  2. Calculate the optimal Section 179 + bonus stacking
  3. Confirm state conformity
  4. If electing out, attach proper statement to timely return
  5. Track resulting NOL if any
  6. Coordinate with multi-year tax planning
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Editorial review by Ed Stapleton Jr. · Founder & Editor

How we evaluate this and what to watch for

What we weigh on this

When we evaluate an application affected by this topic, we look at a small set of factors that drive most of the decision. The four below are the ones that move the rate.

  • Geographic operating territory. Where the equipment will operate matters. We price interstate and cross-border equipment use differently than single-state operation. The program tier shifts if the equipment will operate outside the home state regularly.
  • Personal credit of principals. For owners with 20 percent or more equity, personal FICO drives both the available program and the rate. The pull is soft at prequalification, hard at formal application with the chosen lender.
  • Existing debt service. Lenders look at total monthly debt obligations against cash flow. Adding a new payment that pushes the debt service coverage ratio below 1.20 typically requires additional support or a larger down payment.
  • Owner background and depth. Years of related industry experience, prior ownership of similar equipment, and any documented success operating the asset class affect review. New entrants to a class price differently from established operators expanding within their lane.

Where this goes sideways for borrowers

Every issue below is preventable. The patterns recur not because of bad faith but because borrowers sign documents they have not fully read. The cost of catching these at the application stage is zero.

Down payment timing

Your down payment is typically due at funding, not application. Lenders verify the source of down payment funds for transactions above certain thresholds. Wiring down payment money from a personal account into the business account immediately before funding can flag the deal for additional documentation.

Operating lease end-of-term costs

FMV and TRAC leases include end-of-term obligations that surprise inexperienced lessees: excess wear and tear charges, return logistics, mileage or hour overages, and the fair market value buyout calculation itself. None of these are inherently bad, but knowing the rules at lease signing prevents end-of-term disputes.

Doc fee surprises

Lender documentation fees range from $150 on the low end to $1,500 or more on larger transactions. These are disclosed in the funding documents but easy to skim past. Ask up front what the doc fee is, and whether it is being added to the financed amount or paid out of pocket at funding.

Late payment cascading fees

A 10-day late payment on an equipment loan typically triggers a late fee of 5 to 10 percent of the payment amount. Some contracts also trigger default interest, which jumps the rate by 4 to 6 points until the account cures. The dollar impact of a single missed payment can run into the hundreds.

Pre-signing due diligence

The pre-signing window is when negotiation room exists. After signing, the buyer owns the discrepancy between what was discussed and what is documented. The items below cover the highest-leverage checks.

  • Inspection by independent third party. For used equipment over $50,000, an independent mechanical inspection runs $300 to $800 and surfaces issues a walk-around will not catch. Lenders often require this for used equipment above a threshold.
  • Emissions compliance. For diesel-powered equipment, confirm the unit meets current emissions requirements for the state and operation it will be used in. Tier 4 final compliance, urea/DEF system status, and after-treatment health all affect both legality of use and resale value.
  • Comparable sales data. Pricing checked against recent comparable sales from auction sites, dealer listings, and trade publications. A unit priced 15 percent above market signals either a premium configuration or a seller hoping the buyer does not check.
  • Recall and campaign status. Manufacturer recalls and service campaigns sometimes go uncompleted on used equipment. Verify outstanding recalls before purchase; some are mandatory and prevent the equipment from being registered or operated in certain jurisdictions until completed.
  • Delivery and acceptance terms. Who pays for delivery, what condition the unit must be in at delivery, and what the buyer accepts. The funding documents will reference the delivery and acceptance certificate, which the lender uses to release payment to the seller.

Questions to think through

Do I have to insure the equipment for the full loan amount?
Yes. Physical damage coverage at the financed amount is standard, plus liability if applicable to the equipment class. The lender is named as loss payee for the life of the loan. Verify the coverage language meets the lender requirements before funding.
How does the lender verify the equipment exists and was delivered?
Standard verification: signed delivery and acceptance certificate from you, plus inspection of the equipment or photo verification depending on transaction size. For larger transactions, the lender may send an inspector. For smaller transactions, a signed certificate plus the seller invoice is often enough.
Does my application count as a hard credit pull?
Prequalification through us is a soft pull with no impact on your score. When you accept our offer and proceed to formal application, we run a hard pull at that stage with your consent.
Is there a minimum or maximum loan size?
Our programs run from a $10,000 minimum up to several million on a single transaction. The mid-range (roughly $25,000 to $500,000) is our deepest financing review and best pricing.
Are the rates fixed for the loan term?
Most equipment loans and leases are fixed rate for the full term. Variable-rate equipment financing exists for certain larger transactions but is uncommon under $500,000.
Do I need to disclose other business debt to the lender?
Yes. Lenders calculate debt service coverage on total obligations. Not disclosing material debt can be treated as misrepresentation in the application. Existing business debt is normal and the application accommodates it.

How we structure financing

The financing structure that fits depends on the actual situation. Below are the most common decision branches we walk through with buyers, in plain "if X, then Y" form.

If You are buying equipment that will be sub-rented or leased to others
Then Confirm at application. Sub-rental changes financing review analysis (revenue stability, asset risk) and may require a different program than owner-account use.
If You plan to cycle equipment every 36 to 48 months
Then A true operating lease with FMV residual often beats loan or EFA structures. The lower payment over a shorter term, with return option at the end, fits the use case.
If You have existing equipment loans in good standing with us
Then Your application qualifies for relationship pricing. App-only programs often skip financials when you have a clean history with us.
If Your equipment will be operated by a hired driver or operator
Then Document the operator certification status in advance. Some lenders require proof of OSHA training, CDL, or industry-specific certification before funding on certain equipment categories.
If You operate seasonally with revenue concentrated in specific months
Then Ask for seasonal payment structures (skip payments in off-months, or ramped payments aligned to revenue). Many ag and landscape programs offer these at standard rates.

Timeline expectations

What actually happens day-by-day, from application to equipment in service. Most buyers underestimate one or two of these steps; knowing them up front prevents surprises.

Decision to document signing
1 to 3 business days
Borrower review and signing of credit documents and personal guarantee. Most delays here are borrower-side rather than lender-side.
Apportioned plate registration (trucking)
2 to 4 weeks
New-authority trucking operators need apportioned plates before crossing state lines. Plan this into the funding timeline; temporary trip permits bridge the gap at higher per-state cost.
Title transfer on titled equipment
1 to 4 weeks
Title transfer through state DMV adds weeks to closing on titled equipment. Out-of-state transfers run on the longer end. Title escrow accelerates this in many cases.
UCC-1 filing and search
Filing: same-day. Search: 1-2 business days
UCC-1 financing statement files electronically same-day in most states. Pre-funding UCC search to confirm no existing liens runs 1-2 business days.
Application submission to decision
24 hours to 5 business days
App-only programs decision same-day or next-day. Full-financials programs run 3-5 business days as the file moves through credit, then operations.
Wire transfer cutoff times
Typically 2-3pm PT / 5-6pm ET
After cutoff, wire processes next business day. Late-Friday signings often delay funding until Monday or Tuesday.

Cost stack: what total ownership actually includes

The equipment purchase price is one line on the financed amount. The actual cost of ownership over the life of a how to claim bonus depreciation deal includes the items below. Buyers who only budget for the purchase price often hit cash-flow surprise within the first 12 months.

  • Pre-payment penalties. Standard early-payoff penalty: 3 percent of payoff in year one declining to zero by year three. Or flat fee of $500 to $2,000. Varies by lender.
  • Sales or use tax. State and local sales tax on the equipment. Rolls into financed amount in most states. Manufacturing and qualifying exemptions reduce or eliminate this in many states.
  • Equipment purchase price. Base equipment price as quoted by the dealer. Negotiable, especially on used equipment and end-of-quarter new equipment.
  • Operator training. Manufacturer-provided or third-party operator training. Runs $1,500 to $25,000 depending on equipment complexity. OSHA-compliant training required on many categories.
  • Extended warranty or service contract. Optional but common. Annual cost runs 5 to 15 percent of equipment price on production equipment, 1 to 3 percent on commercial vehicles. Financeable with the equipment.
  • Insurance premiums. Commercial equipment insurance with lender named as loss payee. Annual premiums run 1 to 5 percent of equipment value depending on coverage and equipment category.
  • Late payment fees and penalties. Late fees of 5 to 10 percent of payment if more than 10 days late. Default interest of 4 to 6 points may apply. Worth knowing before signing.
  • Operating consumables. Recurring costs not included in the equipment purchase: fuel, fluids, filters, tools, parts. Equipment-specific.

Authoritative sources

The rate ranges, structures, and program details on this page are informed by our internal financing book and the public industry resources below. We link out so you can verify any specific claim or go deeper.

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Reviewed by

Ed Stapleton Jr.

Founder & Editor

Ed Stapleton Jr. is a serial entrepreneur who has started or acquired over a dozen businesses. He founded Fund My Equipment as the resource he wished he had along the way.

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