Tax depreciation on equipment, software and some building improvements is one of the largest book-tax differences in a small business audit. Two provisions drive it: the special depreciation allowance in IRC section 168(k), commonly called bonus depreciation, and the section 179 expense election. P.L. 119-21, enacted on July 4, 2025 and known as the One Big Beautiful Bill Act, restored 100 percent bonus depreciation for qualified property acquired after January 19, 2025, and raised the section 179 limits. This page covers what each provision allows, how the election mechanics work, and what an audit or review team should look at in the client's tax depreciation and deferred tax accounts. For the broader tax provision, see ASC 740 for private companies.
This page summarizes IRS guidance. It is not tax advice, and state rules often differ.
What does bonus depreciation allow after P.L. 119-21?
Under IRS Publication 946, the Act reinstated the 100 percent special depreciation allowance for qualified property acquired and placed in service after January 19, 2025. That includes property with a long production period and certain aircraft. Treasury and the IRS describe the 100 percent deduction as permanent in Notice 2026-11, which also gave interim guidance that taxpayers may generally rely on the existing special depreciation regulations.
Qualified property includes:
- tangible property depreciated under MACRS with a recovery period of 20 years or less
- computer software defined in and depreciated under section 167(f)(1)
- water utility property
- qualified film, television and live theatrical productions
- qualified sound recording productions (production commencing in tax years ending after July 4, 2025)
It can be new property or certain used property. Property acquired before January 20, 2025 is on the phase-down path. For qualified property acquired after September 27, 2017 and placed in service after December 31, 2024 and before January 1, 2026, the allowance is 40 percent (60 percent for long production period property and certain aircraft).
For the 100 percent rate, the property must be both acquired and placed in service after January 19, 2025. Acquisition date therefore decides which percentage applies, and a client that signed a purchase contract in early January 2025 but received the asset in March needs the acquisition analysis documented. The rules for when property counts as acquired are in the section 168(k) regulations.
The Act also added section 168(n), an elective 100 percent allowance for qualified production property placed in service after July 4, 2025, where construction began or the property was acquired after January 19, 2025. That is a narrow category. Most clients will not meet it.
Can a client turn bonus depreciation off?
Yes. Publication 946 says a taxpayer can elect, for any class of property, not to deduct a special depreciation allowance for all property in that class placed in service during the year. The election is made on a timely filed return, including extensions, by attaching a statement identifying the class. A late election is possible by amended return within six months of the original due date, not counting extensions. Once made, it cannot be revoked without IRS consent.
For property acquired and placed in service after January 19, 2025, a taxpayer can also elect a 40 percent allowance (60 percent for long production period property and certain aircraft) in the first tax year ending after that date instead of 100 percent.
An election out is a planning decision, not an error. Clients with expiring credits, a state that disallows bonus depreciation, or a low-income year sometimes choose it. The audit point is that the tax depreciation schedule and the deferred tax calculation should reflect the election actually filed.
What are the section 179 limits?
Section 179 lets a taxpayer deduct the cost of qualifying property in the year it is placed in service. Publication 946 states these limits:
| Tax years beginning in | Maximum deduction | Reduction begins above |
|---|---|---|
| 2025 | $2,500,000 | $4,000,000 |
| 2026 | $2,560,000 | $4,090,000 |
The maximum is reduced dollar for dollar by the amount that the cost of section 179 property placed in service exceeds the threshold. At 2025 levels, a deduction is unavailable when cost reaches $6,500,000. The deduction for heavy sport utility vehicles is capped separately at $31,300 for 2025 and $32,000 for 2026.
Section 179 also has a business income limit. The deduction cannot exceed taxable income from the active conduct of a trade or business, figured without the section 179 deduction, and any excess carries to the next year. This makes section 179 a poor tool for a loss year. Bonus depreciation has no such limit.
An election can include qualified real property, such as certain roofs, heating and air conditioning, fire protection and security systems on nonresidential buildings.
How do the two provisions work together?
The usual order is section 179 first, then bonus depreciation on the remaining basis, then regular MACRS on whatever is left. In years when bonus is 100 percent, section 179 mainly matters for property that bonus does not reach, for taxpayers who want to limit bonus because a state decouples, and for choosing which assets get expensed.
Worked illustration
Illustrative numbers, 2026. A client places $4,590,000 of section 179 property in service. The cost exceeds the $4,090,000 threshold by $500,000, so the maximum deduction falls from $2,560,000 to $2,060,000. If taxable business income before section 179 is $1,500,000, the deduction is limited to $1,500,000 and $560,000 carries forward.
Deferred taxes. A client buys $300,000 of equipment on January 15, 2026 and uses five-year straight-line depreciation for books.
- Tax deduction in 2026 with 100 percent bonus: $300,000
- Book depreciation in 2026, assuming a full year of straight-line: $300,000 / 5 = $60,000
- Temporary difference at year end: $300,000 - $60,000 = $240,000
- Deferred tax liability at an assumed blended 25 percent rate: $240,000 x 0.25 = $60,000
The liability reverses over the remaining four years as book depreciation continues with no tax deduction left. If the client elected out of bonus for the five-year class, the difference would be the MACRS first-year amount rather than the full cost.
What do audit and review teams check?
- Acquisition and placed-in-service dates for additions, against invoices, contracts and delivery records.
- Eligibility. Whether additions fall in a qualified class, and whether any property is outside it, such as most buildings.
- Elections. The election-out statements and section 179 elections as filed, compared with the tax depreciation schedule. See the fixed asset rollforward template.
- Deferred taxes. Book basis, tax basis and the resulting temporary difference agree to the fixed asset subledger, and the rate applied is the enacted rate.
- State differences. Some states do not follow bonus depreciation or section 179 limits, which changes state deferred taxes and the rate reconciliation.
- Enactment effects. A tax law change is recognized in the period of enactment, which for P.L. 119-21 is the period that includes July 4, 2025.
- Recapture. On disposal, deductions already taken can reduce basis to zero and produce ordinary gain under the depreciation recapture rules.
Use the audit program for income taxes and the audit program for fixed assets together, since the same additions population feeds both.
Common problems
Practice observations, not requirements:
- Capitalized repairs and maintenance in the fixed asset ledger carried into bonus depreciation without review.
- Tax depreciation computed by the preparer with no tie-out to the client's additions list.
- Used property from a related party or an acquired business assumed eligible without checking the acquisition rules.
- Vehicle additions not separated by weight and use, so luxury automobile caps and the SUV limit are missed.
- State add-backs omitted from the provision.
FAQ
Is bonus depreciation mandatory?
Yes unless the client elects out for a class of property. Publication 946 says the taxpayer must take the allowance unless it elects out.
Is section 179 automatic?
No. It is an election the taxpayer makes on its return, and the taxpayer chooses how much of the allowed amount to take and for which assets. Bonus depreciation is the default, and section 179 is not.
Can section 179 create a loss?
No. The deduction is limited to taxable income from active trades or businesses, and the disallowed amount carries forward.
Does 100 percent bonus apply to used equipment?
Qualified property can be new or certain used property. The used-property conditions are in the statute and regulations, so check the acquisition before assuming it qualifies.
Sources
- IRS, Publication 946, How To Depreciate Property (2025), What's New for 2025 and 2026, chapters 2 and 3: https://www.irs.gov/publications/p946
- IRS newsroom, Treasury, IRS issue guidance on the additional first year depreciation deduction (Notice 2026-11): https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill
- Public Law 119-21, section 70301 (bonus depreciation), as cited in Publication 946 (What's New for 2025)
- KPMG, Handbook: Accounting for Income Taxes (2025), discussion of ASC 740-10-25-47 (effect of enacted tax law changes recognized in the period of enactment)
Related
Part of CORAA University · Tax and compliance for CPA firms: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error