Bonus Depreciation 2026 Under the OBBBA: What Changed and How to Use It
The OBBBA ended the bonus depreciation phase-down and restored the full 100% first-year deduction on a permanent basis. Here is what that means for your 2026 tax planning.
Bonus depreciation is a first-year tax deduction under IRC Section 168(k) that lets a taxpayer immediately deduct the full cost of qualifying property instead of spreading it across its recovery period. Under the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, the bonus depreciation rate returned to 100% on a permanent basis for qualifying property acquired after January 19, 2025, reversing the step-down schedule that had reduced the rate to 60% in 2024 and 40% in 2025.
What the OBBBA Actually Changed
Before the OBBBA, bonus depreciation was on its way out. The Tax Cuts and Jobs Act had set a phase-down that dropped the first-year rate from 100% to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027. Every investor buying equipment or completing a cost segregation study was working against a shrinking benefit and a closing window.
The OBBBA removed that schedule entirely. For qualifying property acquired after January 19, 2025 and placed in service thereafter, the bonus rate is 100% and it is permanent. There is no scheduled expiration to plan around, which changes the calculus on almost every acquisition decision.
The date that matters is the acquisition date, not just the placed-in-service date. Property acquired under a binding written contract entered into on or before January 19, 2025 generally remains under the old phase-down percentages even if you place it in service in 2026. If you signed a purchase contract in late 2024 and closed in 2025 or 2026, that distinction is worth several percentage points of your basis, and it is the first thing we check on a new engagement.
What Property Qualifies in 2026
Bonus depreciation applies to property with a MACRS recovery period of 20 years or less. In practice, for the clients we work with, that means four broad categories.
Tangible personal property. Equipment, machinery, vehicles, computers, tools, and furniture. This is the classic case and the least controversial.
Property identified by a cost segregation study. When a study reclassifies portions of a building into 5-year, 7-year, and 15-year categories, every dollar reclassified becomes bonus-eligible. This is where the largest deductions come from for real estate investors, because it converts what would have been 27.5-year or 39-year straight-line depreciation into an immediate write-off.
Qualified improvement property (QIP). Interior improvements to nonresidential buildings placed in service after the building was first placed in service, excluding enlargements, elevators, escalators, and internal structural framework. QIP carries a 15-year recovery period and is bonus-eligible.
Used property. Since the TCJA, bonus depreciation applies to used property as well as new, provided the taxpayer did not previously use it and did not acquire it from a related party. This is what makes cost segregation on an existing building purchase so powerful. You are buying a 40-year-old apartment complex, and the components inside it are new to you.
Qualified Production Property: The New Section 168(n)
The OBBBA also created a new category that has received far less attention than it deserves. IRC Section 168(n) allows 100% first-year depreciation on qualified production property, which is certain nonresidential real property used as an integral part of a qualified production activity such as manufacturing, production, or refining of tangible personal property.
This matters because it is a genuine exception to the rule that buildings are not bonus-eligible. Ordinarily a manufacturing facility is 39-year property and nothing short of a cost segregation study touches it. Under Section 168(n), the qualifying portion of the structure itself can be written off immediately, subject to construction-start and placed-in-service timing requirements.
If you are building or expanding a production facility, this provision can be worth more than every other strategy on your plan combined. It also has recapture provisions if the property stops being used in a qualified production activity within ten years, so it needs to be modeled over the full holding period rather than claimed and forgotten.
How the Deduction Actually Reaches Your Tax Bill
Generating a large deduction and using a large deduction are two different problems. A $400,000 bonus depreciation deduction is worth nothing in the current year if the loss it creates is suspended.
For business owners, the relevant limits are the basis and at-risk rules of IRC Sections 704(d) and 465, and the excess business loss limitation of Section 461(l), which the OBBBA made permanent. Losses above the Section 461(l) threshold are not lost, but they convert into a net operating loss carryforward and are deductible in later years subject to the 80% taxable income limitation.
For real estate investors, the binding constraint is usually the passive activity loss rules of IRC Section 469. Rental losses are passive by default and cannot offset wages or business income. There are two common paths through that wall: qualifying as a real estate professional under Section 469(c)(7), or using the short-term rental exception, under which a property with an average period of customer use of seven days or less is not a rental activity at all for passive loss purposes and only requires material participation.
This is the single most common failure we see in self-directed planning. The client buys the property, orders the cost segregation study, generates the deduction, and then discovers at filing time that the loss is suspended because nobody analyzed material participation before the year closed. Hours cannot be documented retroactively with any credibility.
A Worked Example
Consider a taxpayer who buys a $1,200,000 short-term rental property in 2026, with $250,000 allocated to land and $950,000 to depreciable improvements.
Without a cost segregation study, the property is depreciated over 39 years, since the average stay is under seven days, producing roughly $24,400 in first-year depreciation after the mid-month convention.
With a study reclassifying 32% of the improvement basis, roughly $304,000 moves into 5-, 7-, and 15-year categories. All of it is bonus-eligible at 100%. Add straight-line depreciation on the remaining $646,000 and first-year depreciation is approximately $320,000 rather than $24,400.
If the taxpayer materially participates and the average stay is under seven days, that deduction offsets ordinary income. At a 35% federal marginal rate, the difference in first-year tax is roughly $103,000. The property did not change. The analysis did.
When Taking 100% Is the Wrong Answer
Bonus depreciation is elective by class life, and there are real situations where electing out is the better decision.
If you are in an unusually low bracket this year and expect materially higher income later, accelerating deductions into a low-rate year wastes them. Deductions are worth the rate you avoid, not their face amount.
If you intend to sell the property within a few years, remember that depreciation on 5- and 7-year personal property is recaptured as ordinary income under IRC Section 1245 at your full marginal rate, while straight-line real property depreciation is generally taxed at the 25% unrecaptured Section 1250 rate. Accelerating into Section 1245 property and then selling quickly can convert a 25% item into a 37% item.
If you are running a business near the QBI phase-in thresholds of Section 199A, a large deduction reduces qualified business income and can cost you part of the 20% deduction. The interaction is not intuitive and needs to be modeled.
The point is that 100% is now the default, not the goal. The goal is the largest permanent reduction in lifetime tax, which sometimes means taking less depreciation now.
What to Do Before Year End
Confirm the acquisition date on anything bought around the January 19, 2025 boundary, because that single fact determines whether you are at 100% or on the old phase-down.
Order cost segregation studies early enough that the engineering report is complete before the return is filed, and long enough before year end that you still have time to establish material participation if the loss needs to be non-passive.
Model the passive loss and Section 461(l) limits before you spend money on a study. The study is only worth what the deduction is worth after the limitation rules run.
Document participation hours contemporaneously, in a calendar or log, not reconstructed in March.
Key Takeaways
- The OBBBA made 100% bonus depreciation permanent for property acquired after January 19, 2025, removing the phase-down entirely.
- Acquisition date, not just placed-in-service date, determines whether you get 100% or the older phase-down percentage.
- Cost segregation is the mechanism that makes bonus depreciation meaningful on real estate, because it moves basis into 20-year-and-under categories.
- A large deduction is worthless if the passive activity loss rules suspend it, so material participation must be planned before year end, not at filing.
- Section 168(n) qualified production property is a genuine bonus deduction on a building, and it is the most overlooked provision in the OBBBA.
Frequently Asked Questions
Is bonus depreciation still 100% in 2026?
Yes. The One Big Beautiful Bill Act restored the 100% first-year bonus depreciation rate on a permanent basis for qualifying property acquired after January 19, 2025. The prior phase-down that would have reduced the rate to 20% in 2026 and zero in 2027 no longer applies.
Does bonus depreciation apply to used property?
Yes. Since the Tax Cuts and Jobs Act, bonus depreciation applies to used property as well as new, provided you had not previously used the property and did not acquire it from a related party. This is what allows a cost segregation study on an existing building purchase to generate a full first-year deduction.
Can bonus depreciation create a loss that offsets my W-2 income?
Only in specific circumstances. Rental losses are passive by default under IRC Section 469 and cannot offset wages. The two common exceptions are qualifying as a real estate professional under Section 469(c)(7), or using the short-term rental exception where the average period of customer use is seven days or less and you materially participate. Without one of those, the loss is suspended and carried forward.
What is qualified production property under the OBBBA?
Section 168(n), added by the OBBBA, allows 100% first-year depreciation on certain nonresidential real property used as an integral part of a qualified production activity such as manufacturing or refining. It is a narrow exception to the rule that buildings are not bonus-eligible, and it carries recapture provisions if the property leaves qualified use within ten years.
Should I always elect 100% bonus depreciation?
No. Electing out can be better if you are in an unusually low bracket this year, if you plan to sell soon and want to avoid converting 25% unrecaptured Section 1250 gain into ordinary Section 1245 recapture, or if the deduction would reduce your Section 199A qualified business income deduction. The election is made by class life and should be modeled before filing.
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