100% Bonus Depreciation Is Back: What California Business Owners Need to Know

If you run a business and purchase equipment, vehicles, machinery, or make certain building improvements, the return of 100% bonus depreciation under the One Big Beautiful Bill Act (OBBBA) is one of the most impactful tax developments of 2026. After declining from 100% to 80% (2023), 60% (2024), and 40% (2025), full first-year expensing is permanently restored — retroactive to January 20, 2025.

But for California business owners, there’s a critical caveat: California does not conform. At The Law Office of Pietro Canestrelli, we help business owners across Temecula, San Diego, Riverside, San Bernardino, and all of California navigate this federal-state divide and build depreciation strategies that minimize total taxes.

What Is Bonus Depreciation?

Bonus depreciation under IRC Section 168(k) allows businesses to deduct a percentage of the cost of qualifying assets in the first year the asset is placed in service — instead of depreciating the cost over the asset’s useful life (typically 5 to 39 years depending on the asset type).

At 100%, the entire cost is deducted in year one. For a business purchasing $500,000 in equipment, that’s a $500,000 deduction — which at a 37% marginal rate produces $185,000 in first-year federal tax savings.

What Qualifies for 100% Bonus Depreciation?

Qualifying property includes:

• Tangible personal property with a recovery period of 20 years or less: Equipment, machinery, computers, furniture, vehicles, tools
• Qualified improvement property (QIP): Interior improvements to non-residential buildings (excluding enlargements, elevators/escalators, and internal structural framework)
• Certain used property: Unlike the original TCJA provision, the OBBBA continues to allow bonus depreciation on used property — as long as it’s new to the taxpayer (you haven’t used it before)
• Certain film, television, and live theatrical productions

Property that does NOT qualify includes:

• Real property with a recovery period greater than 20 years (most buildings)
• Property used predominantly outside the United States
• Property acquired from a related party
• Property required to be depreciated using the Alternative Depreciation System (ADS)

The Vehicle Depreciation Rules

Business vehicles are subject to annual depreciation limits (the “luxury auto” caps) regardless of bonus depreciation. For 2026, the first-year cap for passenger automobiles is approximately $20,400 with bonus depreciation ($12,400 without). However, vehicles over 6,000 pounds gross vehicle weight rating (GVWR) — many SUVs, pickup trucks, and vans — are not subject to the luxury auto limits and can receive full bonus depreciation.

This means a qualifying heavy SUV or truck costing $80,000 could generate an $80,000 first-year deduction on the federal return — subject to the business-use percentage requirement. If the vehicle is used 90% for business, $72,000 is deductible in year one.

California’s Nonconformity Creates a Tracking Challenge

Here’s where it gets complicated for California businesses. The state does not allow bonus depreciation under Section 168(k). California requires businesses to use the Modified Accelerated Cost Recovery System (MACRS) depreciation schedules without the bonus depreciation add-on.

The practical impact:

• On your federal return, you deduct the full cost of a qualifying asset in year one
• On your California return, you depreciate the same asset over its recovery period (5, 7, 15, or 39 years depending on asset type)
• You must maintain separate depreciation schedules for federal and California purposes
• In year one, your California taxable income will be significantly higher than your federal taxable income
• In subsequent years, California depreciation deductions will continue while no federal depreciation remains — creating a timing difference that eventually balances out

This tracking requirement is manageable with proper accounting software and professional guidance, but it adds real complexity — especially for businesses with large capital expenditures or frequent equipment turnover.

Section 179 as a California-Friendly Alternative

The Section 179 deduction offers a partial alternative to bonus depreciation that California does partially conform to. Section 179 allows businesses to deduct the full cost of qualifying assets up to an annual limit — and California follows with its own (lower) limit.

For 2026:

• Federal Section 179 limit: The OBBBA expanded this amount — consult with a tax professional for the current year’s limit as it adjusts annually for inflation
• California Section 179 limit: Historically much lower — California has capped its Section 179 deduction at $25,000 in recent years, with a phase-out beginning at $200,000 of asset purchases

For California businesses, the strategy often involves claiming Section 179 up to the California limit (getting both federal and state benefit), then using bonus depreciation for the remaining cost (federal benefit only, with a state depreciation schedule running in parallel).

Strategic Timing of Capital Purchases

With 100% bonus depreciation now permanent, the urgency to “buy before year-end” has diminished somewhat — you’ll get full first-year deduction whenever you purchase during the year. However, timing still matters for:

• Estimated tax calculations: A large mid-year equipment purchase can reduce your Q3 and Q4 estimated tax payments, freeing up cash flow
• California estimated taxes: Since California depreciation is spread over multiple years, the state tax benefit is smaller in year one — plan your California estimated payments accordingly
• Income management: If you’re near a threshold (QBI phase-out, SALT cap phase-down, or OBBBA deduction phase-outs), timing a capital purchase to maximize the deduction in a specific year can have cascading benefits

Common Mistakes to Avoid

• Assuming California follows federal: The #1 error. Do not apply the same depreciation amount on your California return that you claimed federally.
• Ignoring business-use percentage: Bonus depreciation applies only to the business-use portion of an asset. A vehicle used 60% for business and 40% personal only gets bonus depreciation on 60% of the cost.
• Forgetting listed property rules: Certain assets (computers, vehicles, entertainment equipment) are “listed property” subject to additional substantiation requirements. Maintain contemporaneous records of business use.
• Not coordinating with Section 179: The interaction between Section 179 and bonus depreciation is complex. In most cases, you should claim Section 179 first (to get the California benefit), then apply bonus depreciation to the remainder.

Build a Depreciation Strategy for Your Business

At The Law Office of Pietro Canestrelli, we work with business owners across Temecula, San Diego, Riverside, San Bernardino, and all of California to develop depreciation strategies that maximize both federal and state tax benefits. Whether you’re planning a major equipment purchase, evaluating a vehicle acquisition, or making building improvements, we’ll model the federal-state impact and help you make an informed decision.

Planning a significant capital purchase? Contact our office before you buy. Proper planning can save thousands in taxes across both your federal and California returns.