100% Bonus Depreciation Is Back: Your Construction Equipment Tax Guide

A mid-sized electrical contractor in California saved $175,000 on their taxes by understanding one simple rule: equipment placed in service after January 19, 2025 qualifies for 100% bonus depreciation instead of just 40%.

If you're planning equipment purchases whether it's a single excavator or an entire fleet upgrade, this permanent tax change could dramatically reduce your tax bill. But timing, state rules, and coordination with Section 179 all matter. Here's everything construction owners, GCs, and subcontractors need to know.

What Is Bonus Depreciation?

Bonus depreciation lets you write off the full cost of qualifying equipment in Year 1, rather than spreading the deduction over 5-7 years through standard depreciation (MACRS).

The difference:

• Standard depreciation: $500,000 excavator = $100,000/year for 5 years

• 100% bonus depreciation: $500,000 excavator = $500,000 deduction in Year 1

For a contractor in the 35% tax bracket, that's $175,000 in immediate tax savings versus $35,000 per year over five years.

In construction, where equipment costs are high and cash flow is critical, this immediate write-off means more working capital for payroll, materials, and bidding on new projects.

How the Law Changed

The Tax Cuts and Jobs Act initially introduced 100% bonus depreciation in 2017, but it was scheduled to phase down each year: 80% in 2023, 60% in 2024, 40% in 2025, and complete expiration after that.

Then came the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. This legislation permanently restored 100% bonus depreciation for property acquired and placed in service after January 19, 2025.

The Critical Date: January 19, 2025

This creates a sharp dividing line:

• Equipment placed in service before January 20, 2025: Limited to 40% bonus depreciation

• Equipment placed in service after January 19, 2025: Full 100% bonus depreciation

Important note: "Placed in service" means the equipment is delivered, installed, and operational, not just ordered or paid for. Make sure late-year purchases are fully operational before December 31 to claim the deduction on that year's return.

Which Equipment Qualifies?

Basic Requirements

Your equipment must meet all of these criteria:

Tangible property (physical equipment, not services)

MACRS recovery period of 20 years or less

Acquired and placed in service after January 19, 2025

New or used property

Not previously used by you or a related party (5-year lookback)

Common Construction Equipment That Qualifies

Heavy machinery:

• Excavators, backhoes, bulldozers

• Loaders, graders, scrapers

• Cranes and hoists

• Compactors and pavers

Vehicles:

• Dump trucks, flatbeds, cement mixers

• Pickup trucks and crew vehicles (over 6,000 lbs GVWR)

• Service and utility trucks

Tools and equipment:

• Power tools (saws, drills, nail guns)

• Generators and compressors

• Welding equipment

• Scaffolding and safety equipment

Land improvements:

• Fencing and gates

• Paving and parking areas

• Drainage systems

• Temporary site structures

The State Tax Complication You Can't Ignore

Here's where many contractors get caught off guard: not every state follows federal bonus depreciation rules.

Decoupled States

Several states have "decoupled" from federal bonus depreciation, requiring you to add back the federal deduction on your state return and depreciate the equipment over its normal life:

• California

• Illinois

• New York

• Pennsylvania

• New Jersey

• And others

What This Means for Your Tax Bill

Let's say you're a California-based contractor who purchases $500,000 in equipment:

Federal (100% bonus depreciation):

• Deduction: $500,000

• Tax savings: ~$175,000 (35% bracket)

California (decoupled - requires standard depreciation):

• Year 1 deduction: $100,000 (5-year property)

• State "add-back": $400,000

• Additional state tax: ~$48,000 (12% rate on $400,000)

Net benefit: $127,000 instead of $175,000

Planning Around State Rules

Before making major equipment purchases:

1. Verify your state's conformity status: Rules can change, so check current regulations

2. Calculate your combined tax impact: Model both federal savings and state costs

3. Plan your cash flow carefully: Don't spend your federal refund before calculating state liability

4. Consider timing strategies: In some cases, spreading purchases across years may optimize your combined tax position

Section 179 vs. Bonus Depreciation: Which Should You Use?

You can use both Section 179 and bonus depreciation, but understanding when to use each maximizes your tax benefit.

Section 179 (Current Limits)

• Maximum deduction: ~$2.5 million (inflation-adjusted annually)

• Phase-out begins: ~$4.0 million in total equipment purchases

• Income limitation: Cannot exceed taxable business income

• Best for: Smaller equipment purchases when you have positive taxable income

Bonus Depreciation

• No dollar limit on deduction

• No income limitation can create losses

• Best for: Large equipment purchases or when you want to generate a loss

Strategic Decision Framework

Use Section 179 first when:

• You're purchasing qualified improvement property (roofs, HVAC, interior improvements) that qualifies for Section 179 but not bonus depreciation

• Your total purchases are under $2.5 million

• You have positive taxable income and want to reduce it

Use bonus depreciation when:

• You're purchasing heavy equipment over $2.5 million

• You want to create a Net Operating Loss to carry forward or back

• You want maximum flexibility without income restrictions

Combination strategy: If you're buying $3.5 million in equipment, you might apply Section 179 to the first $2.5 million and bonus depreciation to the remaining $1 million, getting a full write-off while avoiding the phase-out threshold.

4 Timing Strategies to Maximize Your Benefit

1. Plan Purchases Throughout the Year

Avoid bunching all purchases in Q4. While bonus depreciation typically bypasses the mid-quarter convention rules, spreading purchases throughout the year gives you more flexibility and reduces administrative complications.

Suggested timeline:

• Q1: Assess needs, verify state rules, create purchase plan

• Q2-Q3: Execute major purchases with proper documentation

• Q4: Final strategic purchases, ensure everything is in service by year-end

2. Consider Used Equipment

Used equipment qualifies for 100% bonus depreciation as long as it's "new to you" (not previously used by you or a related party within the past 5 years).

This opens up significant opportunities:

• Purchase quality used equipment at lower cost

• Still get the full tax benefit

• Free up capital for other business needs

Example: A $400,000 used excavator gives you the same $140,000 tax savings as a $400,000 new excavator, but you save upfront on the purchase price.

3. Coordinate with Your Financing Strategy

Bonus depreciation applies to the full purchase price, not just what you've paid. If you finance equipment, you get the full deduction in Year 1 even though you're paying over time.

Important distinction:

• Purchase (even if financed): Qualifies for bonus depreciation

• Operating lease: Does not qualify (lessor owns the equipment)

If you're considering a lease, make sure it's structured as a purchase with a purchase option at the end, not an operating lease where you never own the equipment.

4. Document Everything

The IRS requires documentation to support your deduction:

• Purchase contracts with dates

• Invoices showing equipment description and cost

• Proof of payment

• Delivery receipts

• Evidence of when equipment was placed in service

• Business use logs (especially for vehicles)

Set up a system to capture this information for every purchase. Missing documentation in an audit can result in disallowed deductions.

Common Mistakes to Avoid

1. Confusing Contract Date with Service Date

The equipment must be placed in service after January 19, 2025 meaning delivered, installed, and operational. Signing a contract or making a deposit isn't enough.

If you order equipment in November but it's not delivered until January, it counts as placed in service in January.

2. Ignoring the Mid-Quarter Convention

While bonus depreciation typically bypasses this issue, if you're using standard depreciation for any property, be aware: if more than 40% of your property purchases happen in Q4, the mid-quarter convention applies, which can reduce first-year deductions.

Best practice: Spread significant purchases throughout the year.

3. Not Planning for State Add-Backs

This is where contractors lose thousands. You see a big federal refund and spend it, then get hit with unexpected state tax bills.

Always calculate your state impact before making spending decisions based on federal savings.

4. Buying Equipment from Related Parties

Equipment purchased from an entity you control or a family member doesn't qualify. The IRS has anti-abuse rules to prevent circular transactions designed solely to generate deductions.

All qualifying purchases must be arm's-length transactions with unrelated parties.

5. Missing Documentation

Poor record-keeping is one of the top reasons deductions get disallowed in audits. Create a system to capture all required documentation as purchases happen, not when you're scrambling at tax time.

Advanced Strategy: Cost Segregation Studies

If you're building or renovating a warehouse, office, or shop, a cost segregation study can significantly increase your bonus depreciation deductions.

How It Works

A cost segregation study reclassifies building components from 39-year property (not eligible for bonus depreciation) into shorter recovery periods that do qualify:

• 39-year property: Building structure

• 15-year property: Land improvements (fencing, paving) - bonus eligible

• 5-year property: Equipment, fixtures - bonus eligible

Real-World Impact

Example: $2 million shop construction

Without cost segregation:

• Entire $2M depreciated over 39 years

• Year 1 deduction: ~$51,000

With cost segregation:

• $1.2M remains 39-year property

• $800K reclassified to 5/15-year property eligible for bonus depreciation

• Year 1 deduction: ~$831,000

Tax savings difference: $273,000 in Year 1 (35% bracket)

Cost segregation studies require professional engineering analysis but can pay for themselves many times over on significant building projects.

The Bottom Line

The permanent restoration of 100% bonus depreciation represents an unprecedented opportunity for construction companies to upgrade equipment while dramatically reducing tax bills.

But success requires understanding:

• The January 19, 2025 cutoff for qualification

• State conformity complications

• Strategic coordination of Section 179 and bonus depreciation

• Proper documentation and timing

A $500,000 equipment purchase could mean $105,000-$175,000 in tax savings, or it could mean a missed opportunity and unexpected state tax bills. The difference comes down to planning.

Need help optimizing your equipment purchase strategy?

Construction Cost Accounting specializes in construction tax planning, including bonus depreciation optimization, state conformity analysis, and cost segregation studies. Contact us for a complimentary strategy consultation.