Where the rule stands right now
One hundred percent bonus depreciation is permanent. The One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025, restored the full deduction under section 168(k) for qualified property acquired and placed in service after January 19, 2025. There is no phase-down waiting and no sunset date to plan around.
The date matters more than the word permanent. Property under a written binding contract entered into before January 20, 2025 is treated as acquired on the contract date, which leaves it under the older phase-down schedule: 40 percent for 2025 and 20 percent for 2026. Two nearly identical buildings placed in service the same week can land on opposite sides of that line depending on when the paperwork was signed. If you were under contract in late 2024 or early 2025, the contract date is the first thing to pull.
In January 2026 the IRS issued Notice 2026-11, interim guidance on the restored rules. It is not a rewrite. Treasury and the IRS said they intend to issue proposed regulations, and that in the meantime the existing regulations apply with the dates swapped, substituting January 19, 2025 for September 27, 2017 and January 20, 2025 for September 28, 2017. If you understood how bonus depreciation worked under the prior law, you understand how it works now.
One caution worth carrying. Interim guidance is not final regulation. The notice allows reliance for property placed in service in a tax year beginning before the proposed regulations are published, provided a taxpayer follows the guidance in its entirety. Anything you claim under it belongs in a file with the notice attached, and your CPA should confirm the current state of the guidance at the time you file, because this is an area that is still moving.
What bonus depreciation actually is
Bonus depreciation is timing, not free money. Every dollar of a building's cost gets deducted eventually. Bonus changes when. Instead of spreading a deduction across decades, it lets you take the whole thing the year the property goes into service.
That distinction sounds like a technicality and it is not. A dollar deducted this year can be reinvested, used to service debt, or used to buy the next property. The same dollar deducted in 2050 is worth a fraction of that after inflation and lost opportunity. The entire value of this strategy is the time value of money, which is also why the honest version of the pitch never promises you a permanent tax cut. It promises you the use of your own money sooner.
The rule that trips up nearly every owner: 20 years or less
Bonus depreciation applies to property with a recovery period of 20 years or less. Your building is not that.
A commercial building depreciates over 39 years. A residential rental depreciates over 27.5. Both are well past the 20-year line, so the structure itself is never eligible for bonus depreciation and never will be. This is the single most common misunderstanding I hear, usually from someone who just bought a property and expected to deduct it.
What does qualify is everything with a shorter life, and there is more of it than people expect.
Five-year property is the stuff inside. Carpet and other flooring, cabinets, decorative lighting, and the specialty wiring that feeds your equipment rather than the building. Seven-year property picks up certain furniture and fixtures. Fifteen-year land improvements are what sits outside. Paving, curbs, site utilities, fencing, landscaping.
One more category counts. Qualified improvement property means interior work done to a commercial building after it opens for business.
Here is the practical problem. None of that appears anywhere on your closing statement. Your CPA receives one number for the building and one number for the land, and puts the building number on a 39-year or 27.5-year schedule, because that is the only defensible thing to do with an undifferentiated number. Bonus depreciation then has nothing to act on. The deduction is not denied. It is invisible.
Which is why bonus depreciation and cost segregation are one strategy, not two
A cost segregation study is what breaks that one building number into parts bonus depreciation can reach.
An engineering-based study starts with the construction documents and the real cost data, then puts a trained professional inside the building to see what is actually there. What comes out is a priced list of the components that legally carry five, seven, and 15-year lives. Once those show up as separate assets on your depreciation schedule, bonus depreciation goes to work on them.
Run in that order, the two rules compound. The study creates the short-life property; bonus depreciation deducts it immediately. Neither does much alone.
To be clear about what I do and do not sell: I do not sell bonus depreciation. Nobody does. It is a rule in the code that applies or does not apply based on your facts. What I deliver is the engineering-based study, through CSSI, and bonus depreciation is already built into the numbers when I run a no-cost analysis for you. It is an input to the estimate, not a separate product. How cost segregation works.
Two elections most owners have never heard of
Both come from Notice 2026-11, and both exist because the biggest deduction is not always the best one.
The election to take 40 percent instead of 100 percent
There is an election, under Section 168(k)(10), to take 40 percent instead of 100 percent. It applies to your first tax year ending after January 19, 2025. A narrow set of property, mostly things with long production periods and certain aircraft, gets 60 percent rather than 40.
Why would anyone volunteer for a smaller deduction? Because a deduction you cannot use this year is worth less than a smaller one you can. A loss that exceeds your income does not vanish, but it does get parked, and parked deductions do nothing for your cash flow. Basis limitations, at-risk rules, net operating loss treatment, and state conformity all bear on this, and a number of states never adopted federal bonus depreciation at all. This is a modeling exercise for your CPA. It is one of the few tax elections where taking less can leave you better off.
The component election for property under construction across the date line
This one solves a painful problem.
Say you built the property yourself and real work started before January 20, 2025. The building as a whole is stuck on the old, smaller percentages. That looks like the end of it.
It is not. Notice 2026-11 lets you elect to claim the full 100 percent on individual pieces of that project, as long as those pieces were bought or built after January 19, 2025 and meet the rules in the underlying regulations.
In plain terms: a project that broke ground on the wrong side of the date is not necessarily a total loss. The later phases may still qualify. The election is made by attaching a statement to a timely filed return, including extensions, which means this is a decision with a deadline attached and not something to discover during an audit.
The place investors actually lose the deduction
Earning a large first-year deduction and being allowed to use it are two different questions, and the second one is where most of the disappointment lives.
Under section 469, a rental activity is generally treated as passive no matter how much you participate in it. Passive losses offset passive income. They do not offset wages, business income, or portfolio income. So an investor who generates a $200,000 first-year deduction on a rental and expects it to erase a W-2 is often told, after the fact, that the loss is suspended and carried forward until there is passive income to absorb it or the property is sold.
There is a limited relief valve. Section 469(i) allows up to $25,000 of rental real estate loss against nonpassive income for taxpayers who actively participate, but it phases out by 50 cents for every dollar of modified adjusted gross income above $100,000 and is generally gone at $150,000. For most people buying investment real estate, it is already unavailable.
Two real paths remain, and both turn on participation rather than intent.
- Real estate professional status, which removes the automatic passive label from your rental activities if you meet two demanding tests.
- The short-term rental path, where property with an average period of customer use of seven days or less is not a rental activity under the regulations at all, which means real estate professional status is not required.
Neither path works without material participation, which has a specific regulatory meaning and seven defined tests. Both are also examined closely, and both are won or lost on contemporaneous records rather than on how the strategy was described to you. Read those two pages before you count on either one.
What it costs you later
Accelerated depreciation comes back at sale, and any honest explanation of this strategy says so up front.
Depreciation reduces your basis in the property. A lower basis means a larger gain when you sell. Gain attributable to depreciation on reclassified personal property is generally recaptured as ordinary income under section 1245. Gain attributable to depreciation on real property is generally treated as unrecaptured section 1250 gain, taxed at a maximum rate of 25 percent. Which assets fall on which side of that split is fact-specific and belongs in your CPA's hands, not in a rule of thumb.
So the real question is not whether you pay it back. It is whether the money is worth more to you now, at your current rates, than the recapture will cost later at the rates that apply then. For an investor who redeploys capital into more property, it usually is. For someone planning to sell in two years into a higher bracket, it may not be. A properly structured 1031 exchange can defer the whole question, which is its own conversation with its own rules.
This is exactly the kind of judgment a no-cost analysis is for. If the numbers do not justify a study on your building, I will tell you that before you spend anything.
If you build things: a newer rule worth knowing about
The same 2025 law created a second break most owners have never heard of.
Section 168(n) lets you deduct 100 percent of the depreciable cost of the part of a commercial building used for production, all in the first year. Production means manufacturing, producing, or refining something in a way that substantially changes it. Not storing it. Not selling it. Changing it.
That is the building itself, which makes it a genuine exception to everything above. The windows are narrow. Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service after July 4, 2025 and before January 1, 2031. Original use has to commence with the taxpayer, and an election is required. Space used for offices, administrative services, lodging, parking, sales, research, software development, or engineering is excluded, so a mixed-use facility requires an allocation of basis between the qualifying and non-qualifying portions. IRS Notice 2026-16 is the interim guidance.
If you are building or expanding a plant, have this conversation now instead of at tax time. Your construction start date is already set, and it is the thing that decides whether you qualify. You cannot go back and change it later.
Questions owners actually ask
Is bonus depreciation still 100 percent?
Yes. Property you bought and placed in service after January 19, 2025 gets the full 100 percent, and no phase-out is waiting this time. One exception. If you signed a binding contract before January 20, 2025, the law treats you as having bought it on that contract date, which puts you back on the older, smaller percentages.
Does bonus depreciation apply to my building?
No. It applies to property with a recovery period of 20 years or less, and buildings are on 39-year or 27.5-year schedules. Bonus reaches the shorter-lived property in and around the building, which is what a study identifies.
Do I need a cost segregation study to use it?
For a building, yes. Without a study your building is one lump number on a long schedule, and there is nothing for bonus depreciation to grab hold of.
Can a bonus deduction offset my W-2 income?
Not automatically, and this is where planning has to happen before the purchase rather than after. See real estate professional status and material participation.
Is it too late if my property was placed in service in an earlier year?
Often not. If you still own the building, depreciation you missed in past years can usually be caught up without amending a single old return. Your CPA files a change in accounting method, and you take the whole catch-up in the current year. The paperwork is their job. The opportunity is real, and it is the most common good surprise that comes out of a no-cost analysis.
Find out what your building is actually hiding
A no-cost analysis takes one short conversation. No documents to gather first, no obligation, and if a study will not pay for itself, I will say so.