Maximizing Bonus Depreciation for Your Small Business in 2025

When tax season arrives, many small business owners start searching for smart ways to reduce their tax burden. One strategy that often draws attention is Bonus Depreciation. It can make a big difference in how much tax you owe. By allowing you to deduct a large part of your equipment or asset cost upfront, Bonus Depreciation can improve your cash flow and help you reinvest in your business faster.

However, the rules around it keep changing. The percentage allowed for deduction is now lower than it was in past years, and this can affect how you plan your purchases and file your taxes in 2025. In this blog, we’ll explore how Bonus Depreciation works, what qualifies, and how your business can use it wisely before the benefits phase down further.

What Bonus Depreciation Means

When you buy big things for your business — say a new delivery van, office furniture, or machines — those are called assets. Usually, you can’t deduct their full cost right away. You must spread it over several years.

Here’s when Bonus Depreciation becomes useful. It lets you deduct a big part, or sometimes all, of the asset’s cost in the first year you buy it. So instead of waiting for years to recover your money through small deductions, you can lower your taxable income right away.

Why Businesses Care About It

Bonus Depreciation can act like a fast refund for your spending. When you spend on assets, your cash goes out. But Bonus Depreciation can bring a part of that cash back through tax savings.

Small businesses love it as it can help free up money for growth, staff, or even more equipment.

A few possible reasons why it matters so much:

• It may boost your cash flow fast.
• It can reduce your tax bill for the year.
• It helps justify big investments.
• It can encourage business growth even in tight years.
  

How Bonus Depreciation Has Changed Over the Years

Bonus Depreciation didn’t always look the same. A few years ago, you could claim 100% of your asset cost in the first year. That was a big deal. But things started to slow down from 2023 onward.

Here’s a quick look at how it’s moving:

• 2023: 80% of the asset cost could be claimed.
• 2024: Dropped to 60%.
• 2025: Now, it stands at 40%.
• 2026: It may move to 20%, unless new laws change it.

So yes, 2025 is still a year you can claim a large chunk — but not all of it anymore. It’s a good time to act while the benefit is still there.

What Qualifies for Bonus Depreciation

Not everything you buy may qualify. But a wide range of things often do.

You can claim Bonus Depreciation on:

• New or used equipment
• Computers and software
• Office furniture and fixtures
• Certain business vehicles
• Tools or machinery
• Qualified improvement property (like upgrades inside your office or shop)

It may not apply to:

• Land or buildings themselves
• Items used for personal purposes
• Assets bought from related parties

A good rule of thumb?
If it’s something used mainly for business and has a life of more than one year, it might qualify.

How Bonus Depreciation Differs from Section 179

People often mix up Bonus Depreciation and Section 179 deduction. Both let you write off the cost of assets. But the way they work isn’t quite the same.

Let’s break that down.

So, Bonus Depreciation can be used if you already used up your Section 179 limit or want a larger deduction.

The Impact on Small Businesses

For a small business, Bonus Depreciation can. Think of it as a way to fuel your growth while easing tax pressure.

a. More Room for Expansion

When you save on taxes, that saved money can be used for other things — maybe hiring, maybe marketing, or maybe even paying off loans.

b. Easier Cash Flow Planning

Instead of long-term depreciation spreading across years, you can reduce your taxable income early, which can help balance your yearly cash needs.

c. Flexibility with Asset Purchases

You can plan asset purchases around tax timing. For instance, buying before the year-end might give you a bigger deduction that same year.

Key Steps to Maximize Bonus Depreciation in 2025

Now that we know how powerful it can be, how do you make the best use of it?

Step 1: Review Your Capital Plan

Check what major purchases you are planning this year or next.
If any of those qualify, you may want to buy them sooner rather than later.

Step 2: Time Your Purchases

Bonus Depreciation applies in the year you place the asset in service, not just when you buy it.
So make sure your assets are installed, running, or ready to use before the year ends.

Step 3: Combine with Section 179

Sometimes, the best savings come when you use both together.
Use Section 179 for smaller purchases, and Bonus Depreciation for bigger ones.

Step 4: Keep Records Ready

Always keep detailed records of:

• The asset cost
• The date you started using it
• Any related expenses

Those details can help your accountant claim the right deduction without confusion.

Step 5: Talk to a Tax Expert

Tax rules shift often. A small consultation can help you avoid missing out on benefits. A professional may help you on how to balance deductions so you don’t end up with a tax loss that might not help your business.

Common Mistakes Businesses Make

Even though Bonus Depreciation sounds simple, some mistakes may cost you.

Here are a few to avoid:

• Waiting too long to place assets in service.
• Assuming all property qualifies.
• Forgetting to check state tax rules (not all states follow federal rules).
• Not planning future deductions — using too much now may reduce benefits later.

A bit of planning can help you use Bonus Depreciation without leaving future years dry.

State Tax Impact of Bonus Depreciation

Here’s something many people miss — not all states allow the same level of Bonus Depreciation as the federal government.

Some may:

• Fully follow (allow the same deduction)
• Partially follow(allow only part of it)
• Not follow at all (disallow the deduction)

So, while your federal tax might drop a lot, your state tax might not. Always check your state’s rules before making large deductions.

Since the deduction percentage will likely keep dropping, 2025 might be your best window to benefit while rates are still decent.

You might:

• Move some planned equipment purchases earlier.
• Review depreciation schedules for older assets.
• Explore financing options that let you buy now and deduct this year.

Bonus Depreciation may not vanish soon, but the full benefit won’t last forever. Acting in time can make a clear difference.

How to Record Bonus Depreciation in Your Books

If you manage your own accounting, this part can get tricky.

Here’s a simple outline:

• Record the full asset cost as an asset in your books.
• Record the Bonus Depreciation amount as an expense (depreciation expense).
• The remaining cost, if any, will depreciate normally over the next years.

Your accountant or QuickBooks setup may handle this automatically once you tag the asset type and service date. If you don’t want to do it yourself, you can easily outsource it to Meru Accounting. We have helped many businesses enjoy the maximum benefit of Bonus Depreciation.

Example of How Bonus Depreciation Works

Let’s take a simple case.

Suppose you buy new machinery for $100,000 in 2025. The Bonus Depreciation rate is 40%. That means you can claim $40,000 this year.

If you also use Section 179, you may write off even more — depending on your limits. That’s how real savings may show up on your tax return, lowering your taxable income quickly.

Bonus Depreciation may not sound helpful at first. But it can play a quiet yet strong role in your financial story. By planning your purchases, tracking your assets, and knowing when to claim what, you can turn simple spending into real savings.

Even when the rate keeps shrinking over time, the window in 2025 still offers meaningful value. Using it wisely might benefit your business in one or many ways.

FAQs

1. What is Bonus Depreciation?
   It lets you deduct a large part of an asset’s cost in the first year instead of spreading it out over time.
2. What is the Bonus Depreciation rate in 2025?
   In 2025, the rate stands at 40% of the asset’s cost.
3. Can used assets qualify for Bonus Depreciation?
   Yes, as long as they are new to your business.
4. What types of assets qualify?
   Equipment, vehicles, furniture, and certain property improvements often qualify.
5. Does land qualify for Bonus Depreciation?
   No, land and buildings do not qualify.
6. Can I use Bonus Depreciation and Section 179 together?
   Yes, many businesses use both for maximum deductions.
7. Do I need to make a profit to claim it?
   No, Bonus Depreciation can create a loss, unlike Section 179.
8. How do I claim Bonus Depreciation?
   You claim it through your tax return with Form 4562.
9. Can I choose not to use it?
   Yes, you can elect out if it doesn’t fit your tax plan.
10. Does every state allow Bonus Depreciation?
    No, some states limit or disallow it, so check your local rules.
11. Can I claim it on software?
    Yes, business-use software often qualifies.
12. What happens if I sell the asset later?
    You might need to recapture some depreciation as taxable income.
13. Does Bonus Depreciation apply to vehicles?
    Yes, though limits apply to passenger vehicles.
14. What if I buy an asset in December?
    You can still claim it if it’s in service before year-end.
15. Can Bonus Depreciation carry forward?
    No, it applies in the year you place the asset in service.
16. How long will Bonus Depreciation last?
    It’s set to phase down to 20% by 2026 unless extended.
17. Is it better than Section 179?
    It depends on your business size and income level.
18. Can I use Bonus Depreciation for rentals?
    Yes, if the property is used for business and not personal use.
19. How does it affect my financial statements?
    It reduces net income for the year but improves cash flow.
20. Should every business use it?
    Not always. The best use depends on your income, timing, and tax goals.