Section 168(k)
Bonus depreciation is back at 100% — and it is not scheduled to go away
The phase-down that was going to take bonus to 20% in 2026 and zero in 2027 was repealed. For property acquired and placed in service after 19 January 2025, the rate is 100% with no sunset in the statute.
What changed and when
Under the 2017 legislation, bonus depreciation was 100% through 2022 and then stepped down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and nothing after that. Owners spent several years timing acquisitions around that decline.
The One Big Beautiful Bill Act, signed 4 July 2025, amended section 168(k) to restore the 100% additional first-year depreciation allowance permanently for qualified property acquired and placed in service after 19 January 2025. Treasury and the IRS issued interim guidance in Notice 2026-11 on 14 January 2026, which largely carries forward the familiar framework from the existing regulations with the new dates substituted.
Drag through the history
The short version: it fell, then it came back for good. Everything placed in service and acquired after 19 January 2025 gets the full 100%.
| Placed in service | Bonus rate | Notes |
|---|---|---|
| 2023 | 80% | Phase-down under prior law |
| 2024 | 60% | Phase-down under prior law |
| 1 Jan – 19 Jan 2025 | 40% | Pre-amendment rate applies |
| On or after 20 Jan 2025 | 100% | Permanent; acquisition must also be after 19 Jan 2025 |
| 2026 and forward | 100% | No scheduled phase-down |
Why this matters so much for cost segregation
Bonus depreciation applies to property with a recovery period of 20 years or less. A building does not qualify. The 5-year carpet inside it, the 7-year fixtures and the 15-year parking lot all do.
A study is therefore the mechanism that converts non-qualifying basis into qualifying basis. Without one, a $3 million commercial building generates about $64,000 of first-year depreciation. With a study reclassifying 25% and 100% bonus applying to the reclassified portion, the first-year deduction is roughly $806,000.
What qualifies
- MACRS property with a recovery period of 20 years or less
- Qualified improvement property (15-year life)
- Land improvements (15-year life)
- Computer software depreciable under section 167
- Certain water utility property, qualified film, television and live theatrical productions, and — new under the 2025 legislation — qualified sound recording productions
- Used property, provided it was not previously used by you and was not acquired from a related party
Section 168(n) — the new qualified production property deduction
The 2025 legislation also created a separate 100% deduction for qualified production property: certain nonresidential real property used as an integral part of manufacturing, production or refining in the United States, placed in service after 4 July 2025 and before 2031, with construction beginning within a defined window.
This is genuinely new territory, because it reaches the building shell itself — the one thing cost segregation was never able to accelerate. Interim guidance arrived in Notice 2026-16 in February 2026. If you are building or expanding a plant, the section 168(n) analysis and the cost segregation study should be run together rather than sequentially. More on manufacturing facilities.
When electing out is the right answer
Taking the maximum deduction is not automatically optimal. Consider electing out where:
- You have expiring net operating losses or credits that a large deduction would waste
- The loss would be suspended under the passive activity rules anyway, and you would rather have the deductions in later years when you expect passive income
- Your state does not conform, creating a permanent federal-state schedule mismatch you would rather avoid
- You expect materially higher marginal rates in future years
- Excess business loss limitations under section 461(l) would cap the current-year benefit
The election is made by class of property for the taxable year, so it is not all or nothing across your whole schedule.
From real schedule reviews
The missed bonus we keep finding
Before anyone pays for a study, we read the depreciation schedule. These came off actual schedules that crossed our desk — details withheld.
A $1.5M commercial improvement, bonus never claimed → ≈$547K back in refunds
A $1,535,000 improvement to a commercial property, correctly listed as 15-year property — but nobody had ever claimed the bonus depreciation it qualified for. It was still inside the amendment window, so instead of a catch-up we amended the returns. The correction produced a refund of approximately $547,000. The asset was on the schedule the whole time; someone just had to read it.
Bonus simply never taken
A refrigerator and a washer, correctly on 5-year schedules, placed in service in an 80% bonus year — and no bonus claimed on either. Roughly $3,000 of deduction left sitting, for no reason at all. Small dollars, but it tells you nobody was looking.
“Capital improvement” — of what, exactly?
About $127K across four vague improvement lines, all parked at 27.5 years. Flooring, appliances and site work were almost certainly inside — 5 and 15-year property, bonus-eligible, none of it accelerated.
Park-owned homes treated as the building
Roughly $600K of park-owned homes swept into 27.5-year real property. Manufactured homes held as rentals are personal property — bonus-eligible the entire time. The single biggest miss we see on park schedules.
A whole portfolio on straight-line
Four rentals, about $1.15M of combined basis, every dollar on 27.5-year straight-line since purchase. No study, no acceleration, year after year. A Form 3115 catch-up fixes it on one return.
A portfolio catch-up worth $642,762
Corrections across a group of properties — misclassified improvements, missed bonus, wrong lives — rolled into a single Section 481(a) deduction of about $642,762. At a 35% combined rate, roughly $225K of tax.
Site improvements, two misses on one park
About $132K of 2018 site work that missed 100% bonus (≈$98K of deductions), plus $23.5K of 2021 improvements correctly at 15 years but with no bonus taken (≈$17K more). Both found in one schedule read.
One property, $249,267 recoverable
A single-property review surfaced roughly $249K of depreciation that should already have been claimed. No new assets discovered — the schedule just had the wrong lives and missing bonus.
Findings from schedules reviewed in real engagements; identifying details withheld. Reading your schedule costs nothing — send it with the intake and we'll tell you what we see.
Common questions
Is bonus depreciation really permanent now?
The 2025 legislation removed the scheduled phase-down and set the rate at 100% for qualified property acquired and placed in service after 19 January 2025, with no sunset written into the provision. 'Permanent' in tax means until Congress changes it, but there is no expiration date sitting in the statute the way there was under the 2017 rules.
What rate applies to property I placed in service earlier in 2025?
Property placed in service between 1 January and 19 January 2025 falls under the pre-existing 40% rate. There is also an election to apply 40% (or 60% for certain long-production-period property) for property placed in service in the first taxable year ending after 19 January 2025 — useful if you would rather not create a large loss in that year.
Does the building itself qualify for bonus depreciation?
Generally no. Bonus applies to property with a recovery period of 20 years or less, which excludes 27.5 and 39-year real property. That is precisely why cost segregation matters: the study is what moves basis into the classes that qualify. The one new exception is Section 168(n) qualified production property for certain manufacturing facilities.
Can I elect out?
Yes. Bonus depreciation applies automatically unless you elect out, and the election is made by class of property for the year. Owners with expiring net operating losses, credits they want to use, or state conformity problems sometimes elect out deliberately. It is a real decision, not a formality.
Do states follow the federal bonus rules?
Many do not. A substantial number of states decouple from section 168(k) entirely, requiring an addback of federal bonus depreciation and a separate state depreciation schedule. This does not defeat the strategy, but it does mean the state benefit and the federal benefit are different numbers. We flag conformity in the study for the states you file in.
What is used property eligibility?
Since 2017, bonus depreciation applies to used property as well as new, provided the property was not previously used by the taxpayer and was not acquired from a related party or in certain carryover-basis transactions. This is why buying an existing building — not just building one — supports a bonus-eligible study.
Related topics
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