Who Can Claim Bonus Depreciation? What It Is, Who Created It, and Who Actually Benefits

TL;DR: Bonus depreciation lets you deduct the full cost of qualifying business property in the year you put it to work, instead of spreading that deduction over five, seven, or fifteen years. Congress created it in 2002, in the Job Creation and Worker Assistance Act, as a 30 percent write-off. The One Big Beautiful Bill Act made it 100 percent and permanent for property acquired after January 19, 2025. Who can claim bonus depreciation? Any taxpayer who owns qualifying property and uses it in a business or rental, whether that's an individual, a partnership, an LLC, an S corporation, or a C corporation. It's automatic unless you elect out. But being allowed to claim it and actually benefiting from it are two different questions, and the second one is where most investors get surprised.

Key Takeaways

• Bonus depreciation is a first-year deduction under Internal Revenue Code Section 168(k) for property with a recovery period of 20 years or less, plus a few other categories such as off-the-shelf software.
• Congress created it. It became law on March 9, 2002, as part of Public Law 107-147. The IRS administers it but did not write it.
• The rate has moved a lot: 30 percent in 2002, 50 percent in 2003, gone for most property from 2005 through 2007, back in 2008, 100 percent in late 2010, and a phase-down after 2022 before the 2025 law restored 100 percent permanently.
• The statute does not limit who claims it by entity type. It limits which property qualifies. Regulated utilities, certain dealers using floor plan financing, and property that must use the alternative depreciation system are carved out.
• You get it by default. Electing out is a choice you make one class of property at a time.
• The people who benefit most are the ones with income the deduction can actually offset. For real estate investors, that turns on the passive activity rules.

What is bonus depreciation?

Bonus depreciation is permission to deduct a big chunk of an asset's cost in year one. Right now that chunk is 100 percent.

Normally, when a business buys something that lasts, it can't deduct the cost all at once. It depreciates it. A delivery van gets written off over five years. Office furniture over seven. A parking lot over fifteen. The tax code assigns each type of property a recovery period, and the deduction trickles out across it.

Bonus depreciation cuts the trickle short. The statute says the depreciation deduction for the year the property is placed in service "shall include an allowance equal to 100 percent of the adjusted basis of the qualified property." In plain terms: buy a $60,000 piece of equipment, put it in service this year, and you can deduct all $60,000 this year.

It only applies to property with a recovery period of 20 years or less, along with a few named categories like computer software and qualified film and theater productions. That rule matters enormously for real estate. A residential rental building depreciates over 27.5 years. A commercial building takes 39. Neither one qualifies as a whole. Land never depreciates at all. Investors still get bonus depreciation on buildings, through a side door covered further down.

Who created bonus depreciation?

Congress did. Bonus depreciation is a statute, not an IRS program, and it started with the Job Creation and Worker Assistance Act of 2002, Public Law 107-147. President George W. Bush signed it on March 9, 2002.

That first version was modest by today's standards. It allowed an extra 30 percent in year one. The dates in it tell you why it exists. Section 101 of the Act covered property "acquired after September 10, 2001, and before September 11, 2004." The start date is the day before the September 11 attacks. This was part of the economic response to that fall's recession and shock, and it was built to be temporary.

It didn't stay temporary for long, and it didn't stay at 30 percent. According to the Congressional Research Service's history of the provision (Report RL31852, updated February 7, 2024), the path went like this:

• 2003: Congress raised the allowance to 50 percent.
• 2006 and 2007: No bonus depreciation. It had lapsed.
• 2008: The Economic Stimulus Act of 2008 brought back the 50 percent allowance.
• September 2010 through 2011: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 raised it to 100 percent for the first time.

Congress kept extending it after that, usually a year or two at a time, at varying rates. Then the Tax Cuts and Jobs Act of 2017 made two big changes. It set the rate at 100 percent for property acquired after September 27, 2017, and it opened bonus depreciation to used property for the first time. It also built in a phase-down. For property placed in service after December 31, 2022, the rate dropped 20 points a year: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, with 20 percent scheduled for 2026.

The One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025, ended that countdown. Section 70301 restored 100 percent bonus depreciation for property acquired after January 19, 2025, and removed the expiration. The IRS issued interim guidance on the change in Notice 2026-11 on January 14, 2026.

The idea is older than 2002, by the way. The original Section 179, enacted in the Small Business Tax Revision Act of 1958, gave small businesses an extra first-year allowance of 20 percent on up to $10,000 of equipment cost, per the same CRS report. Section 179 has since become its own separate deduction with its own rules, which I compare side by side in bonus depreciation vs. Section 179.

Who can claim bonus depreciation?

Anyone who owns qualified property and uses it in a trade or business or to produce income. Section 168(k) doesn't restrict the deduction by who you are. It restricts it by what you bought.

That means individuals with a Schedule C business or a rental on Schedule E, partnerships and multi-member LLCs, S corporations, and C corporations can all claim it. In a partnership or S corporation, the entity claims the deduction and it flows through to the owners on their K-1s. How that allocation works among partners is its own topic, covered in who gets the cost segregation deduction in a partnership.

The property itself has to pass the tests. The IRS lists four in its bonus depreciation FAQ (last reviewed May 12, 2026): the property must be of a qualifying type, its use must meet the original-use or used-property rules, it must be acquired within the right window, and it must be placed in service within the right window.

Used property qualifies, with conditions. The IRS FAQ says the property must not have been "used by the taxpayer or a predecessor at any time prior to such acquisition," and it can't be acquired from a related party. Buy a rental from an unrelated seller and you're fine. Move property between your own entities and you're not.

Who can't claim it

A few groups are shut out by statute or regulation:

• Regulated public utilities. Property used primarily in certain rate-regulated utility businesses is excluded under Section 168(k)(9).
• Dealers using floor plan financing. Car and equipment dealers who deduct floor plan financing interest under the business interest rules lose bonus depreciation on the affected property.
• Anyone required to use the alternative depreciation system. Under Section 168(k)(2)(D), "The term 'qualified property' shall not include any property to which the alternative depreciation system under subsection (g) applies."

That last one catches real estate investors who make the real property trade or business election to escape the business interest limit under Section 163(j). The election forces the alternative depreciation system onto the buildings and onto qualified improvement property, the interior improvements to commercial space. Qualified improvement property then loses bonus depreciation. The 5-year, 7-year, and 15-year components identified in a cost segregation study generally keep it. It's a real trade, and one worth modeling before you elect.

The January 19, 2025 date

For property acquired on or before January 19, 2025, the old phase-down rate still applies: 40 percent if placed in service in 2025, 20 percent in 2026. The One Big Beautiful Bill Act measures acquisition by the contract. Under Section 70301(c)(4), as quoted in Notice 2026-11, "property is not treated as acquired after the date a written binding contract is entered into for such acquisition." Sign a binding purchase contract on January 10, 2025, close in March, and you're on the old schedule.

Who gets bonus depreciation automatically?

Everyone who places qualified property in service. You don't apply for bonus depreciation or check a box to receive it. It's the default.

What you choose is whether to turn it down. Under Section 168(k)(7), you can elect out, but the election covers an entire class of property for the whole tax year. You can't keep bonus depreciation on one piece of 5-year property and skip it on another placed in service the same year. The reasons you might want to, and the mechanics, are in when should you elect out of bonus depreciation.

The 2025 law added one more option for the transition year. Notice 2026-11 explains that taxpayers may "elect to deduct 40 percent (60 percent for certain property having longer production periods or certain aircraft), instead of 100 percent" for qualified property placed in service during their first taxable year ending after January 19, 2025. For a calendar-year taxpayer, that's the 2025 return.

Who actually benefits from bonus depreciation?

The people with income the deduction can reach. A deduction you can't use this year is a carryforward, not a refund.

Business owners who buy equipment, vehicles, and software feel it most directly. The deduction runs against the business's income. Unlike Section 179, bonus depreciation has no annual dollar cap and no business income limit, so it can push a business into a loss.

Real estate investors are a different story, because rental activity is passive by default under Section 469. Passive losses offset passive income. They don't offset W-2 wages or business profits unless something changes the character of the loss. Two things commonly do:

• Real estate professional status. You spend more than half your working time, and more than 750 hours a year, in real property businesses where you materially participate. The details are in the IRS real estate professional guide.
• Short-term rentals you materially participate in. When the average guest stay is seven days or less, the property isn't treated as a rental activity for these rules. That's why so many high earners have used the short-term rental strategy.

A passive investor with neither isn't shut out. The losses carry forward and absorb passive income later, or come loose when the property is sold. They just don't hit this year's paycheck.

Even with non-passive losses, one more gate sits at the end. The excess business loss limitation caps net business losses against other income at $256,000 for 2026, or $512,000 on a joint return, per Rev. Proc. 2025-32. I cover it fully in the excess business loss limitation in 2026.

Who benefits less

Three situations shrink the payoff. If you're in a low bracket now and expect a much higher one soon, a deduction spread over future years can be worth more. If you plan to sell in a year or two, depreciation on personal property components is generally recaptured as ordinary income at sale, which I walk through in what happens when you sell after cost segregation. And if your state doesn't follow the federal rule, you'll add some of it back on the state return. Several large states decouple, as covered in your state may not have gotten the memo.

None of those makes bonus depreciation a bad deal. They make it a decision you run numbers on, rather than a default you accept blind.

How does a building owner get bonus depreciation?

With a cost segregation study. The building as a whole doesn't qualify, but many of the things inside and around it do.

Carpet, cabinetry, dedicated electrical, and certain fixtures often fall into 5-year or 7-year property. Parking lots, sidewalks, fencing, and landscaping are 15-year land improvements. All of those have recovery periods of 20 years or less, so all of them can take 100 percent bonus depreciation once they're properly identified and valued.

Here's a simplified illustration, not a projection. An investor buys a long-term rental and $1,000,000 of the price is allocated to the building. Without a study, that's roughly $36,000 a year of depreciation over 27.5 years. Say a study moves $250,000 of that basis into 5-year, 7-year, and 15-year property. That $250,000 is deductible in year one under bonus depreciation, on top of regular depreciation on the remaining $750,000. How much actually moves depends entirely on the building.

The study has to hold up. I only recommend engineering-based cost segregation, built on an in-person site visit by a trained professional who measures and documents what's actually there. A desktop estimate or a rule-of-thumb percentage isn't a cheaper version of the same thing. It's a weaker file if the IRS ever asks how you got your numbers. If you bought the property years ago, a look-back study can catch up missed depreciation without amending old returns.

Frequently Asked Questions

Who created bonus depreciation?

Congress created bonus depreciation in the Job Creation and Worker Assistance Act of 2002, Public Law 107-147, which President George W. Bush signed on March 9, 2002. It started as a 30 percent first-year allowance for property acquired after September 10, 2001. The IRS administers the deduction but did not create it.

Can individuals claim bonus depreciation, or only businesses?

Individuals can claim it. Section 168(k) limits which property qualifies, not which taxpayers. An individual with a sole proprietorship or rental property, a partnership, an LLC, an S corporation, and a C corporation can all claim bonus depreciation on qualified property they place in service.

Can I claim bonus depreciation on a rental property?

Not on the building itself, because residential rental buildings depreciate over 27.5 years and commercial buildings over 39 years. Bonus depreciation applies only to property with a recovery period of 20 years or less. A cost segregation study identifies components inside and around the building, such as flooring, fixtures, and parking lots, that fall into 5-year, 7-year, or 15-year classes and can qualify.

Does bonus depreciation apply to used property?

Yes, since the Tax Cuts and Jobs Act of 2017, as long as the property was not used by the taxpayer or a predecessor before the acquisition and was not acquired from a related party. Buying a property from an unrelated seller generally satisfies the used property rules.

Do I have to elect bonus depreciation?

No. Bonus depreciation applies automatically to qualified property. You can elect out under Section 168(k)(7), but the election applies to an entire class of property placed in service in that tax year.

Is 100 percent bonus depreciation permanent?

Under current law, yes. The One Big Beautiful Bill Act, Public Law 119-21, restored 100 percent bonus depreciation permanently for qualified property acquired after January 19, 2025. Property acquired under a written binding contract entered into on or before that date remains on the prior phase-down schedule.

Find out what bonus depreciation is worth on your property

The question that matters is how much of your building qualifies and whether you can use the deduction when it lands. I offer a no-cost analysis, delivered through my relationship with CSSI (Cost Segregation Services, Inc.). No obligation and no pitch. If a study won't pay for itself on your property, I'll tell you that.

Book a time at calendly.com/david-wiener/cs, or call 770-224-8504 and choose option two. Bring the address and roughly what you paid. Nothing else to gather first.

Sources

• 26 U.S.C. Section 168(k), including (k)(1), (k)(2)(D), (k)(7), (k)(9), and (k)(10), as amended by Pub. L. 119-21, Section 70301, July 4, 2025. uscode.house.gov
• Job Creation and Worker Assistance Act of 2002, Pub. L. 107-147, Section 101, approved March 9, 2002. govinfo.gov
• IRS Notice 2026-11 and news release IR-2026-06, January 14, 2026. irs.gov
• IRS, Additional First Year Depreciation Deduction (Bonus) FAQ, page last reviewed or updated May 12, 2026. irs.gov
• Treas. Reg. Section 1.168(k)-2(b)(2)(ii) and (b)(3)(iii).
• Congressional Research Service, Report RL31852, Gary Guenther, updated February 7, 2024. everycrsreport.com
• IRS Rev. Proc. 2025-32, Section 4.31.

This article is educational and is not tax advice. Your facts decide your result, so review any depreciation decision with your own CPA or tax advisor before you act on it.