Depreciation is one of the largest deductions available to business owners and real estate investors — and it’s also one of the most deadline-sensitive. The choices that affect how much you deduct this year need to be made before December 31, not when you sit down with your tax preparer in March.

Why Timing Matters More Than You Think

Most tax deductions are simply a matter of reporting what happened. Depreciation is different. Several of the most valuable depreciation strategies require you to place assets in service, make an election, or structure a transaction before the year ends. Once January 1 arrives, some of those options close permanently for that tax year.

If you’ve acquired business equipment, vehicles, or real estate improvements this year — or if you’re considering it — the decisions you make in the next few months will determine whether those costs reduce your 2026 tax bill or get stretched out over years.

Bonus Depreciation Is Back to 100% — And This Time It’s Permanent

Bonus depreciation allows you to immediately deduct a large percentage of the cost of qualifying property in the year it’s placed in service, rather than depreciating it over the asset’s useful life.

Under the Tax Cuts and Jobs Act, bonus depreciation was 100% through 2022, then began phasing down — 80% in 2023, 60% in 2024, and 40% in 2025. That phase-down schedule was set to hit 20% in 2026 and disappear entirely in 2027.

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, changed that. It restored 100% bonus depreciation on a permanent basis — no expiration date, no future phase-down — for qualifying property acquired after January 19, 2025, and placed in service in 2025 or later. There’s an important nuance in the acquisition date: property under a written binding contract entered into on or before January 19, 2025, generally doesn’t qualify for the restored 100% rate even if it’s placed in service later. If you have a purchase in progress that started before that date, confirm with your tax advisor which rate actually applies.

Qualifying property includes most tangible personal property with a useful life of 20 years or less: equipment, machinery, computers, vehicles, and certain improvements to nonresidential real property (qualified improvement property). The asset must be placed in service — meaning it’s ready and available for use — before year-end. Ordering equipment in December that doesn’t arrive until January doesn’t count.

OBBBA also created a separate 100% expensing category for “qualified production property” — certain new nonresidential real property used in manufacturing, production, or refining. That’s a narrower rule with its own requirements and is worth a separate conversation if it applies to your business.

Section 179 — Electing Immediate Expensing

Section 179 is a separate immediate expensing election that lets businesses deduct the cost of qualifying property up to an annual limit. OBBBA permanently raised that limit: for 2025 the cap was set at $2.5 million, with a $4 million phase-out threshold, and both figures are now indexed for inflation. For 2026, the limit is $2,560,000, phasing out dollar-for-dollar once total qualifying purchases exceed $4,090,000 and disappearing entirely at $6,650,000. Confirm the exact current-year figures with your advisor, since they adjust annually.

Unlike bonus depreciation, Section 179 has business income limitations — you can’t use it to create a loss. It also applies to used equipment purchased for business use, not just new property.

The election must be made on your tax return for the year the property is placed in service. But the underlying decision — whether to purchase and place the asset in service this year versus next — has to happen before year-end.

For business owners who are profitable and want to reduce this year’s taxable income, a Section 179 election on a needed equipment purchase can be a clean, immediate reduction. For those who already have little taxable income, the deduction may be better deferred. And with bonus depreciation now permanently at 100%, many businesses will find bonus depreciation alone accomplishes what they used to need Section 179 for — the two are worth comparing together rather than defaulting to one.

Cost Segregation for Real Property

If you’ve purchased or improved commercial or residential rental property this year, cost segregation is worth discussing before year-end. A cost segregation study reclassifies portions of a building’s cost from 39-year (or 27.5-year for residential) depreciation into shorter-lived categories — 5, 7, or 15 years — that qualify for bonus depreciation or accelerated schedules.

The result: instead of depreciating a $1.5 million building entirely over 39 years ($38,000/year), a cost segregation study might identify $400,000 worth of components that can be depreciated much faster, creating a significant first-year deduction. With 100% bonus depreciation now permanent, everything a cost segregation study reclassifies into a shorter recovery period can potentially be expensed immediately in the year it’s placed in service, rather than partially phased in — which makes the studies more valuable than they were during the phase-down years.

Cost segregation requires a study by a qualified engineer and isn’t free. It’s most cost-effective for properties valued at $500,000 or more. But if you’ve acquired or improved a substantial property this year, having the study completed before year-end lets you capture the accelerated depreciation on this year’s return.

The Placed-in-Service Requirement

Every depreciation strategy hinges on the asset being “placed in service” during the tax year. This means the asset is in a condition or state of readiness to be used in your business — it doesn’t have to be actually used, just ready and available.

For equipment: installation complete, functioning, available for use. For a rental property: available for rent (even if not yet occupied). For a vehicle: titled, insured, and available for business use.

If you’re planning a purchase, the placed-in-service date is within your control. Completing a purchase and getting equipment operational before December 31 versus January 2 can be the difference between a 2026 deduction and a 2027 deduction.

What to Review Before Year-End

Run through this checklist with your advisor in October or November, not December 31:

Review equipment and vehicle purchases made during the year. Determine whether Section 179 or bonus depreciation (or both) should be applied, and whether the current year’s income makes an immediate deduction worthwhile.

Evaluate any planned capital purchases. If you’ve been considering new equipment or business assets, assess whether purchasing before year-end serves your tax position. Don’t buy something you don’t need just for a deduction — but if the need exists, timing matters.

Assess real property acquisitions. If you bought or improved commercial or investment property, ask whether a cost segregation study is worth the investment.

Review your vehicle log if you use a vehicle for business. The business use percentage affects how much depreciation you can claim, and passenger vehicles have annual deduction caps that vary based on the type of vehicle and its cost.

Frequently Asked Questions

Q: Can I take bonus depreciation on a vehicle?

A: Yes, but passenger vehicles have annual luxury auto caps that limit the deduction regardless of the vehicle’s cost. Heavy SUVs, trucks, and vans (over 6,000 lbs. GVWR) aren’t subject to the same passenger-auto caps and can qualify for a large Section 179 deduction up to a separate annual limit for that vehicle category. Verify current limits with your advisor, since both figures adjust for inflation each year.

Q: What if I buy equipment in December but don’t start using it until January?

A: The asset generally isn’t considered placed in service until it’s ready and available for use. Simply purchasing and receiving it isn’t enough — it needs to be in a condition or state of readiness for its intended use.

Q: Does bonus depreciation create a loss I can use against other income?

A: Possibly, depending on your business structure and circumstances. Unlike Section 179, bonus depreciation can create a net operating loss. Whether that loss is deductible against other income depends on at-risk rules, passive activity rules, and other limitations specific to your situation.

Q: Does the return of 100% bonus depreciation mean year-end planning matters less now?

A: No — if anything, it raises the stakes. Because the 100% rate is now permanent, there’s no phase-down schedule pushing you toward a “use it while it’s high” mindset, but the placed-in-service deadline still falls on December 31 every year. An asset that isn’t ready and available for use by year-end simply moves the deduction to next year regardless of the rate.

Depreciation elections are one of the few places in tax where proactive planning before year-end has a direct, measurable impact on what you owe. The time to have this conversation is now — not during tax season when the options have already closed.

If you’d like to apply this to your situation, the team at Molen & Associates is here to help. Schedule a consultation at molentax.com.