Bonus Depreciation Is Back: How Construction, Real Estate, and Equipment-Heavy Businesses Can Plan Smarter

Businesses buying vehicles, machinery, software, equipment, or qualified improvements can use depreciation planning to improve cash flow under the permanent 100% additional first-year deduction for eligible property acquired after January 19, 2025.

For construction contractors, real estate operators, manufacturers, distributors, and other asset-intensive businesses, depreciation can materially affect tax payments and the cash available for operations and future investment.

The One Big Beautiful Bill Act restored and made permanent a 100% additional first-year depreciation deduction for qualifying property acquired and placed in service after January 19, 2025. The change removes the scheduled federal phase-down, but it does not make every capital expenditure immediately deductible. Asset classification, acquisition dates, business use, and state and city treatment still matter.

What the Permanent 100% Rule Changes

Bonus depreciation allows a business to deduct the eligible cost of qualified property in the year the asset is placed in service rather than recovering that cost over the normal depreciation schedule. “Placed in service” generally means the asset is ready and available for its intended business use. Paying a deposit, signing a purchase order, or having equipment delivered to a storage location may not be enough. The permanent 100% rate provides more certainty for multiyear capital planning. Contractors replacing fleets and wholesalers automating warehouses can evaluate the tax effect without assuming the deduction will shrink later. Qualifying used property may also be eligible when acquisition requirements are met and the buyer did not previously use it. The deduction changes the timing of taxable income; it does not reduce the purchase price. A first-year write-off may lower federal estimated taxes, but businesses should still model financing, operating needs, future income, and possible depreciation recapture.

Which Purchases May Qualify

Qualified property generally includes depreciable business assets with a recovery period of 20 years or less, certain computer software, qualified improvement property, and several specialized categories. The building itself and land generally do not qualify under the standard bonus depreciation rules. Real estate owners may still find opportunities through qualified interior improvements and cost segregation studies that identify shorter-life components. Vehicles require particular care. For passenger automobiles placed in service in 2026, the federal first-year depreciation ceiling is $20,300 when bonus depreciation applies. Heavier SUVs, pickups, and vans may fall under different rules, while the 2026 Section 179 amount taken into account for many SUVs is capped at $32,000. Business use generally must exceed 50%, and contemporaneous mileage and use records remain essential.

How to Time and Structure Capital Purchases

Year-end planning should begin with an asset schedule, not a shopping list. Identify genuine business needs, delivery and installation dates, contract terms, financing, and when each asset can begin its intended function. A machine ordered in December but installed in February will generally belong to the later tax year. Businesses should also compare bonus depreciation with Section 179. For tax years beginning in 2026, the federal Section 179 deduction limit is $2.56 million, with the deduction beginning to phase out when total qualifying property placed in service exceeds $4.09 million. Section 179 is subject to taxable-income and other limitations, while bonus depreciation follows a different set of rules and generally applies automatically unless the business elects out for a class of property. A company may choose Section 179 for selected assets, apply bonus depreciation to remaining eligible basis, or elect out for a property class to preserve later deductions. The best result is not always the largest current deduction. Businesses expecting higher future tax rates, limited current taxable income, ownership changes, or a near-term asset sale may benefit from a more measured approach.

Why NYC Businesses Need a Federal, State, and City Plan

New York tax treatment can differ sharply from the federal result. New York State generally requires modifications for federal bonus depreciation and calculates a separate state depreciation deduction. New York City also generally decouples from federal bonus depreciation, subject to limited exceptions, and uses separate adjustment schedules. A business may therefore receive a large federal deduction while recognizing a much smaller current New York State or City deduction. Those differences create parallel tax bases that must be tracked through the life and eventual sale of the asset. They can also affect estimated payments, partner or shareholder reporting, financial statement tax provisions, and transaction modeling. Before closing a major equipment purchase or improvement project, model the federal, New York State, and New York City consequences together. Thoughtful depreciation planning can turn a necessary capital investment into a meaningful cash-flow tool without allowing the tax deduction to drive an uneconomic purchase. VJN Associates can help businesses evaluate asset eligibility, timing, documentation, and multijurisdictional tax effects before year-end decisions become irreversible.