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The Monet Blog · Taxes

Bonus depreciation in 2026: what it covers and what limits it

How first-year bonus depreciation works, which property qualifies, and the loss limitation that decides how much of it you can actually use this year.

By Sankha NagChoudhurySeptember 17, 20268 min read

Bonus depreciation lets a business deduct a large share of an asset's cost in the year it is placed in service instead of spreading it over years. It is powerful, it is frequently oversold, and the part that catches people is not the deduction itself — it is the cap on how much business loss you are allowed to use.

What qualifies

Bonus depreciation generally applies to tangible property with a recovery period of twenty years or less, off-the-shelf software, and certain qualified improvement property. It can apply to used assets as well as new, provided the asset is new to you and not acquired from a related party.

  • Equipment, machinery, vehicles above the applicable weight thresholds, furniture, and many fixtures.
  • Qualified improvement property — interior improvements to non-residential buildings, with exclusions for enlargements, elevators, and structural framework.
  • Not land, not the building shell, and not assets acquired from a related party or by gift.

Placed in service is the date that matters

The deduction attaches to the year the asset is ready and available for its intended use, not the year it was ordered or paid for. Equipment sitting in a crate on December 31 is a common and avoidable disallowance.

  • Keep delivery, installation, and commissioning documentation.
  • For financed purchases, the full cost basis counts in year one even though the loan is repaid over years.
  • Short tax years and mid-quarter conventions can change the outcome; confirm with your preparer.

Bonus depreciation versus Section 179

The two often apply to the same asset and are commonly used together, but they behave differently. Section 179 is elective per asset, capped in dollar terms, and cannot create a loss. Bonus depreciation applies automatically unless you elect out, is not capped by an annual dollar limit, and can create a loss.

  • Section 179 first on assets you want to expense selectively, then bonus depreciation on the rest.
  • Section 179 is limited to business taxable income; bonus depreciation is not.
  • Electing out is by asset class, not by individual asset.

The limit people hit: excess business loss

Even a fully valid bonus deduction can be parked. Section 461(l) caps the net business loss a non-corporate taxpayer can use against other income. For married filing jointly the limit is $512,000; the disallowed amount is not lost but carries forward as a net operating loss.

  • A large financed purchase can generate a paper loss far above what you can use in one year.
  • The excess carries forward — the benefit is deferred, not destroyed.
  • Passive-activity and material-participation rules apply on top; a W-2 earner generally needs real, documented hours in the activity.

Recapture and the exit you have not planned yet

Accelerated deductions lower your basis. Sell the asset, convert it to personal use, or drop business use below fifty percent and part of the deduction comes back as ordinary income.

  • Model the deduction and the eventual recapture together, not separately.
  • Track business-use percentage annually for vehicles and mixed-use equipment.
  • A deduction that is recaptured at a higher rate later is a timing win, not a permanent one.

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Educational guidance, not personal advice. Outputs are illustrative, may contain errors, and should be independently verified before material decisions.

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