If you’ve ever bought equipment for your business and wondered whether you could write it off immediately instead of spreading the deduction over several years, bonus depreciation is the answer to that question.
It’s one of the more valuable tax tools available to small business owners, and the rules around it changed significantly with the One Big Beautiful Bill Act signed into law in July 2025. Here’s what it is, how it works and what that means for your business.
The Basics: What Is Depreciation?
When a business buys a long-term asset something like a piece of equipment, a vehicle, machinery, furniture, the IRS generally doesn’t let you deduct the full cost in the year you bought it. Instead, you depreciate it: spread the deduction out over the asset’s “useful life,” which the IRS defines for different categories of property.
So if you buy a $20,000 piece of equipment with a five-year useful life, standard depreciation might give you a $4,000 deduction per year for five years.
That’s fine, but it means you’re waiting years to see the full tax benefit of a purchase you made today.
What Is Bonus Depreciation?
Bonus depreciation lets you deduct a large percentage — or all — of a qualifying asset’s cost in the year you place it in service, rather than depreciating it over time.
Under the One Big Beautiful Bill Act, businesses can now deduct 100% of the cost of qualified property placed in service after January 19, 2025. This is a significant change from the phase-down schedule that had been reducing the bonus depreciation percentage in recent years.
In practical terms: if you buy a $50,000 piece of equipment this year and it qualifies, you can deduct the full $50,000 on your 2025 tax return instead of deducting $10,000 per year for five years.
What Qualifies for Bonus Depreciation?
Not everything qualifies. The property generally needs to meet a few criteria:
It must have a useful life of 20 years or less under the standard IRS depreciation system. This covers most business equipment, machinery, computers, software and certain vehicles. Real property — buildings and most land improvements — generally does not qualify.
It must be new to you as the owner, though it doesn’t have to be brand new. Used property can qualify for bonus depreciation as long as your business hasn’t previously used it.
It must be placed in service during the tax year, meaning it has to be ready and available for use, not just purchased. Ordering equipment in December that doesn’t arrive until January counts for the following year, not the current one.
How Bonus Depreciation Benefits Small Businesses
It accelerates your tax savings. The core benefit is timing. You get the tax deduction now rather than over five, seven or fifteen years. For a business that needs to reduce its taxable income this year, that’s meaningful — particularly if you’re approaching a higher tax bracket or trying to offset a strong revenue year.
It improves cash flow. A lower tax bill means more cash stays in the business. If you’re reinvesting that money into operations, hiring or additional equipment, the compounding effect can be significant.
It lowers the after-tax cost of equipment. When you factor in the immediate deduction, the real cost of a $50,000 equipment purchase is reduced by your marginal tax rate. For an S-Corp owner in a 30% combined federal and state bracket, that’s effectively a $15,000 reduction in the out-of-pocket cost of the equipment.
It rewards businesses that are growing. Companies in expansion mode — buying equipment, building out infrastructure, investing in capacity — benefit most from bonus depreciation because they have more qualifying purchases to write off.
Bonus Depreciation vs. Section 179
You may have heard of Section 179, which is another provision that lets businesses deduct the cost of equipment upfront. The two are similar but not identical.
Section 179 has an annual deduction limit (for 2025, it’s $1.22 million) and cannot create a tax loss — you can only use it to the extent of your business income. Bonus depreciation has no such cap and can create or increase a net operating loss, which can then be carried forward to offset future income.
For most small businesses, either provision will accomplish the same goal. But in situations where a business has a low-income year or wants to create a loss, bonus depreciation offers more flexibility.
In practice, many businesses use Section 179 first and then apply bonus depreciation to any remaining cost.
A Few Things to Watch
State conformity is not guaranteed. Federal bonus depreciation rules don’t automatically apply at the state level. California, notably, does not conform to federal bonus depreciation, meaning California business owners who take the federal deduction will need to add it back on their California return and depreciate the asset under California’s rules separately. This creates a difference between your federal and state taxable income that your accountant will need to track.
It doesn’t help if you have no income to offset. Bonus depreciation is only useful if you have taxable income to reduce. A business in its first year with minimal revenue may get limited immediate benefit, though the resulting net operating loss can be carried forward.
Vehicles have additional limits. The IRS caps depreciation deductions for passenger vehicles, even if bonus depreciation applies. Work trucks and SUVs over a certain gross vehicle weight rating have higher limits and may be worth considering if a vehicle purchase is on the horizon.
The Bottom Line
Bonus depreciation is one of the most straightforward tax benefits available to small businesses, and with 100% first-year expensing restored under the One Big Beautiful Bill Act, the timing is particularly good.
If your business is planning to buy equipment, vehicles or other qualifying property in 2025, talking to your accountant before the purchase ensures you structure it in a way that maximizes the deduction. The rules around timing, asset classification and state tax implications are important.
Accounting Fresh provides bookkeeping and accounting services for small businesses in San Diego County. If you have questions about how bonus depreciation applies to your business, reach out here.