Business Depreciation and Bonus Depreciation Phase-Down for 2026: What Owners Need to Prepare For

Business Depreciation and Bonus Depreciation Phase-Down for 2026: What Owners Need to Prepare For

Bonus depreciation rules have offered major tax savings for businesses by allowing accelerated write-offs on equipment and property. However, beginning in 2026, the phase-down will reduce the immediate deduction available, impacting purchasing decisions and year-end planning. Understanding these changes now helps businesses optimize capital investments and manage tax liability.

Overview

Depreciation is a core tax strategy for businesses investing in equipment, machinery, technology, vehicles, and certain real property improvements. For years, bonus depreciation enabled companies to deduct a large percentage of qualifying asset costs in the same year of purchase. With the Tax Cuts and Jobs Act provisions expiring soon, the bonus depreciation benefit will scale down, requiring more strategic planning for capital expenditures.

Current Bonus Depreciation Rules (Through 2025)

Businesses can presently deduct a significant portion of asset costs in the year they are placed into service.
Under 2025 rules:

  • 60% bonus depreciation in 2025

  • Remainder of the asset depreciated over its normal recovery schedule
    This approach provides immediate tax relief and improves cash flow, especially for capital-intensive industries.

Bonus Depreciation Phase-Down Timeline

Unless legislative changes occur, bonus depreciation is scheduled to decrease as follows:

  • 2023: 80%

  • 2024: 60%

  • 2025: 40%

  • 2026: 20%

  • 2027 & beyond: 0% (unless extended)

Once eliminated, businesses will rely primarily on Section 179 expensing and traditional depreciation schedules.

Section 179 vs. Bonus Depreciation: Key Differences

Feature Section 179 Bonus Depreciation
Annual spending limit Yes No
Business income limit Yes No
New or used assets Both Both
Applies to Tangible personal property, certain improvements Most business assets

With bonus depreciation decreasing, Section 179 expensing becomes more valuable, especially for small and mid-sized businesses.

Planning Strategies for 2026

  1. Accelerate Purchases Before Full Phase-Down
    Consider purchasing major machinery, vehicles, or equipment before 2026 to lock in higher deductions.

  2. Evaluate Asset Categories and Useful Life
    Assets with shorter lives provide faster depreciation recovery; prioritize investments with higher tax impact.

  3. Time Improvements to Commercial Property
    Qualified improvement property (QIP) remains eligible for accelerated depreciation under certain rules.

  4. Integrate Tax Planning With Cash Flow Forecasts
    Coordinate equipment financing, business growth projections, and tax outcomes to maintain liquidity.

  5. Use Section 179 Strategically
    Section 179 can fill deduction gaps left by reduced bonus depreciation, but must be planned based on income limitations.

Industries Most Affected

  • Construction and contracting

  • Manufacturing and fabrication

  • Logistics and trucking

  • Real estate improvements

  • Agriculture and farming

  • Retail and restaurants upgrading facilities

Businesses in these sectors rely heavily on equipment and will feel the impact of reduced first-year deductions.

Conclusion

The reduction of bonus depreciation in 2026 marks a major shift in business tax planning. Companies that proactively schedule equipment purchases, use Section 179 effectively, and integrate tax forecasting into investment decisions will sustain cash flow advantages. Planning ahead ensures capital expenditures remain tax-efficient as the rules evolve.

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