IRC §168(k) — Bonus Depreciation

Plain-English definition

Bonus depreciation under IRC §168(k) is an additional first-year depreciation deduction equal to a percentage of the adjusted basis of qualifying property. The current rate is 100% for property placed in service after January 19, 2025, restored by the One Big Beautiful Bill Act (OBBBA) signed that date.

Bonus depreciation is layered on top of MACRS, not in lieu of it. The taxpayer takes the §168(k) deduction first, then depreciates any remaining basis under MACRS over the recovery period.

What the law says

Current rate and history

The “applicable percentage” in §168(k)(1)(A) has changed eight times since the provision was enacted in 2002:

The OBBBA restoration is structured as a permanent restoration under current law. There is no scheduled phase-down. A future Congress could amend, but no sunset is in current law.

For the full multi-decade timeline including the 2008 Economic Stimulus Act, the 2010 Tax Relief Act, and PATH Act bonus extensions, see /bonus-depreciation/history/.

Qualifying property

Property qualifies for §168(k) bonus depreciation if it meets four tests:

1. Recovery period of 20 years or less. This is the central limit — 27.5-year residential rental and 39-year nonresidential real property are out. 5-year, 7-year, 15-year, and 20-year property are in.

2. MACRS depreciable property under §168(a) or computer software under §167(f)(1)(B). Property depreciated under ADS (alternative depreciation system) does not qualify.

3. Original use begins with the taxpayer, or used property meeting the acquisition tests. Post-TCJA, used property qualifies as long as: (a) the taxpayer or predecessor did not previously own it, and (b) it was not acquired from a related party or as a component of a Section 351 transaction.

4. Placed in service during the applicable period. The placed-in-service test is when the asset is ready and available for its intended use — not the date of acquisition or contracting.

The fourth test is where the binding-written-contract transition rule under Notice 2025-17 matters: property under binding written contract on January 19, 2025 may use the pre-OBBBA rate that applied at the contract date, rather than the OBBBA 100% rate, if the taxpayer so elects.

Real-property strategy: cost segregation as the bridge

The §168(k) 20-year-or-less limit is why cost segregation matters disproportionately for real estate.

A $1.2M residential rental property’s basis is mostly 27.5-year structural — which does not qualify for bonus depreciation. But an engineered cost segregation study typically reclassifies 22–30% of the basis into 5-year personal property and 8–12% into 15-year land improvements. Those reclassified components qualify for 100% bonus depreciation in year 1.

The arithmetic on a $1.2M duplex placed in service June 2023 (the worked example below):

• Straight-line first-year deduction (mid-month June, 7 months): $22,440
• Cost-segregation reclassification (5-yr personal property, ~22% of basis): $224,400
• Cost-segregation reclassification (15-yr land improvements, ~8% of basis): $81,600
• Bonus depreciation on the accelerated buckets (2023 rate: 80%): $244,800
• Total year-1 deduction with cost seg + bonus: $491,280

Under OBBBA 100% bonus, the same property placed in service after January 19, 2025 produces a larger year-1 deduction because the bonus rate is 100% rather than 80%. The structural arithmetic doesn’t change; the multiplier does.

§179 interaction

IRC §179 immediate expensing and §168(k) bonus depreciation coexist. Where the same property qualifies for both:

1. §179 election is applied first, up to the dollar limit ($1.29M for 2026, phased out above $3.22M investment) and the taxable-income limitation.
2. Bonus depreciation under §168(k) applies to the remaining basis.
3. MACRS depreciation under §168 applies to whatever basis remains after §179 and bonus (typically $0 at 100% bonus).

The key practical distinction:

• §179 cannot create a net loss — the deduction is limited to taxable income, with excess carried forward.
• Bonus depreciation can create a net loss — there is no taxable-income cap on §168(k).

Real estate professionals (REPs) using §168(k) to create losses that offset active income through the §469 REPS exception rely specifically on this distinction.

Election to opt out

The election out of §168(k) is made on a class-by-class basis. For each MACRS class (5-yr, 7-yr, 15-yr, 20-yr), the taxpayer can:

• Take bonus depreciation at the current rate (default)
• Elect out — bonus is skipped for that class for that year; MACRS depreciation applies to the full basis over the recovery period

The election is made by attaching a statement to the original tax return. It is irrevocable for that class for that year without IRS consent under Rev. Proc. 2015-13.

Common reason to elect out: a taxpayer who expects significantly higher marginal rates in future years prefers MACRS depreciation spread across the recovery period rather than concentrated in year 1.

Recapture on disposition

Bonus depreciation taken under §168(k) is recaptured when the property is disposed of. The recapture treatment follows the property’s MACRS class:

• 5-year and 7-year property: §1245 recapture at ordinary income rates on the full depreciation taken (including the bonus portion).
• 15-year land improvements: §1245 recapture as well — these qualify as §1245 property by reference to §168(e)(3).
• 20-year property: §1245.

There is no special “bonus depreciation recapture” rule — it’s all §1245 ordinary-income recapture on the depreciation that was taken. The §1245 vs §1250 distinction is what determines the rate.

Common errors

1. Treating 100% bonus as automatic for any new property. The 20-year-or-less recovery-period test eliminates 27.5-year and 39-year real property from direct eligibility. Cost segregation is required to surface the qualifying components.

2. Missing the placed-in-service vs acquisition date distinction. Property purchased in 2024 and placed in service in 2025 follows the 2025 rate (100%), not the 2024 rate (60%). The placed-in-service date controls.

3. Filing bonus depreciation late without Form 3115. If §168(k) was not claimed in the year of placement, the catch-up requires Form 3115 under Rev. Proc. 2015-13 — not an amended return. Rev. Proc. 2026-08 provides current automatic consent procedures for late §168(k) elections.

4. Bonus on ADS-elected property. A taxpayer that elected out of §163(j) interest limitations under §163(j)(7) is required to depreciate certain real property classes under ADS. ADS-classified property is not eligible for §168(k). This election is a foreclosure of future bonus depreciation that should be quantified before making the election.

5. Confusing §168(k) with §179. Both are first-year deductions, but §179 is an election with dollar/investment limits and a taxable-income cap; §168(k) is automatic (subject to the opt-out election) with no income cap.

Sources

• Statute: 26 U.S.C. § 168(k) — Cornell LII; as amended by OBBBA §70302(a) (January 19, 2025)
• Regulations: Treas. Reg. § 1.168(k)-2 (final regulations under TD 9993, September 2020)
• IRS guidance: Notice 2025-17 (binding-contract transition rule); Rev. Proc. 2026-08 (automatic consent for late §168(k) elections); Notice 2026-12 (placed-in-service date for binding contracts)
• Publications: IRS Pub. 946 — How to Depreciate Property (2025 edition, OBBBA-incorporated)
• Legislative: Tax Cuts and Jobs Act of 2017 § 13201 (original TCJA bonus rules); One Big Beautiful Bill Act § 70302 (2025 restoration)

Need to apply 100% bonus depreciation to a specific property? The §168(k) calculation depends on the property’s MACRS class, the placed-in-service date, and whether cost segregation has identified eligible components. A property-by-property worked calculation shows the year-1 bonus depreciation impact alongside the underlying classification.