What is bonus depreciation? Definition, how to calculate, and benefits in 2025

Running a business means purchasing equipment, furniture, vehicles, and tech that support your operations, drive growth, and keep you competitive. But those essential business expenses can also save you money at tax time. 

Whether you’re upgrading your IT equipment, expanding your fleet, or renovating your space, knowing how bonus depreciation works can help you plan smarter and save more. This glossary entry explains what it is, what’s changed in 2025, and how it compares to Section 179 of the tax code.

Bonus depreciation definition

Bonus depreciation is a tax incentive that allows businesses to immediately deduct a large percentage of the cost of eligible assets, such as equipment or machinery, in the year the asset is placed in service. The percentage is set by federal law.

Bonus depreciation in 2025 

The bonus depreciation percentage is currently 40% in 2025. This means businesses can immediately deduct 40% of the cost of eligible assets in the year those assets are placed in service. The remaining 60% must be depreciated over the standard recovery period. This period varies by asset type—for example, five years for computers and vehicles, seven years for office furniture, and up to 39 years for commercial real estate—using the IRS’s Modified Accelerated Cost Recovery System (MACRS).

This 40% rate is part of a planned phase-out that began after the Tax Cuts and Jobs Act of 2017. It’s set to fall to 20% in 2026 and expire entirely in 2027. 

Why bonus depreciation is important to businesses 

Bonus depreciation is a valuable tax strategy that allows businesses to recover the cost of eligible assets, including many types of fixed assets, more quickly. Taking larger deductions upfront can boost cash flow, lower tax liability, and free up funds for reinvestment.

Benefits of bonus depreciation

Bonus depreciation offers a range of financial and strategic benefits that can help businesses strengthen their bottom line. Here are some of the most impactful ways it can work in your favor:

Accelerates cost recovery

Deducting a large portion of an asset’s cost in the first year means a faster return on your investment and better liquidity.

Reduces taxable income

Immediate deductions lower taxable income in the year the asset is placed in service, resulting in potential tax savings.

Encourages capital investment

Large upfront deductions make it more appealing for businesses to invest in new equipment, vehicles, or technology.

Maximizes tax strategy

Bonus depreciation can be used with Section 179 expensing, but unlike Section 179, it isn’t limited by income thresholds or dollar caps.

Offsets future taxes

If the deduction creates a net operating loss, it can be carried forward to reduce taxes in future years.

How to calculate bonus depreciation

Bonus depreciation lets businesses deduct a portion of the cost of qualifying assets in the year they’re placed in service instead of depreciating them over time. Here's a step-by-step look at how to calculate it:

Step 1: Determine the total cost

Add up the purchase price plus any additional costs required to acquire and prepare the asset for use (e.g., sales tax, delivery, installation).

Step 2: Confirm eligibility 

Make sure the asset qualifies for bonus depreciation. It must typically:

• Be new or used (new to you)
• Have a useful life of more than one year
• Be used for business purposes

Step 3: Apply the bonus depreciation rate

Multiply the total asset cost by the applicable bonus depreciation rate (e.g., 40% in 2025)

Formula:

Bonus Depreciation Deduction = Total Cost × Bonus Depreciation Rate

Example:

If you purchase eligible equipment for $50,000 in 2025:

$50,000 × 40% = $20,000 deduction in Year 1

The remaining $30,000 is depreciated over the asset’s standard recovery period.

Step 4: Record the deduction

Include the deduction on your business tax return for the year the asset was placed in service. Bonus depreciation is reported on IRS Form 4562, titled Depreciation and Amortization. This form is used to claim both Section 179 deductions and bonus depreciation (among other depreciation methods).

Examples of bonus depreciation

To see how bonus depreciation works in real-world situations, here are a few examples across different types of business assets:

Example 1: Bonus depreciation for office equipment 

A business purchases $10,000 worth of computers and printers in 2025.

• Bonus depreciation rate for 2025 = 40%
• Immediate deduction: $10,000 × 40% = $4,000
• The remaining $6,000 is depreciated over the standard 5-year recovery period for office equipment.

Example 2: Bonus depreciation for heavy SUV used for business

You buy a $70,000 SUV with a GVWR over 6,000 pounds and use it 100% for business.

• Bonus depreciation allows a full 40% deduction in 2025:
• Immediate write-off: $70,000 × 40% = $28,000
• The remaining $42,000 is depreciated under standard MACRS rules specified in IRS Publication 946.

Note: If this vehicle had been under 6,000 pounds, it would be subject to the annual “luxury auto” limits, and bonus depreciation would be limited.

Example 4: Bonus depreciation for a Qualified Improvement Property (QIP)

A business makes $100,000 in interior improvements to a nonresidential building.

• If the improvements qualify as QIP, they’re eligible for bonus depreciation:
• 2025 deduction: $100,000 × 40% = $40,000
• The remaining $60,000 is depreciated over 15 years under the MACRS rules.

The rules of bonus depreciation

To take advantage of bonus depreciation, businesses must adhere to the following IRS rules to ensure eligibility and proper reporting:

Business use required

The asset must be used in your trade or business and have more than one year of useful life.

Must be new or used property

Bonus depreciation applies to both new and used assets, as long as it’s the first time the asset is used by the taxpayer.

Placed in service during the tax year

The asset must be placed in service during the same tax year you claim the deduction.

Must fall within eligible property categories

Certain assets like land, buildings, and other real property do not qualify for bonus depreciation.

Irrevocable election out option

If you elect out of bonus depreciation for a specific asset class (for example, all five-year properties), the election applies to all assets in that class placed in service during the same tax year.

Accurate recordkeeping

While there is no official bonus depreciation mandate, businesses must maintain accurate records of asset costs, in-service dates, and amounts claimed to support the deduction. Failing to keep these records can lead to issues if your tax return is ever audited.

Bonus depreciation limitations  

In addition to bonus depreciation rules, there are limitations business owners must be aware of. 

• Eligible property only. Bonus depreciation applies to qualifying new or used property with a recovery period of 20 years or less, such as machinery, equipment, computers, appliances, and certain vehicles. Land and buildings are not eligible.
• Must meet placed-in-service criteria. The asset must have been placed in service during the tax year in which the deduction is claimed.
• Order of deductions. Apply Section 179 expensing first, up to its annual limit. Bonus depreciation is then applied to the remaining adjusted basis of the asset. Unlike Section 179, there is no cap on the total bonus depreciation amount that can be claimed in a given year. Businesses can deduct large amounts if they acquire substantial qualifying assets.
• Phase-down schedule. The bonus depreciation rate is subject to a scheduled phase-down:
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0% (unless changed by Congress)

Bonus depreciation rates and schedule 

The table below outlines the current bonus depreciation rates based on the year an asset is placed in service, following the phase-down schedule established by the Tax Cuts and Jobs Act. Information is current as of 2025.

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