Bonus Depreciation Income Limitation 2025: The Overlooked Rule That Can Slash Your Write-Offs by $97,000+

Most profitable California business owners are still planning on using bonus depreciation in 2025 like it’s 2022—without realizing that the rules (and the practical savings) have changed. Misunderstanding the new bonus depreciation income limitation 2025 isn’t just a technical risk—it’s a recipe for permanently losing high-value deductions, overpaying state taxes, and making cash flow mistakes that can haunt your operation for years.

This post breaks down why many savvy LLCs, S Corps, and investors are walking into a tax trap this year—and the step-by-step playbook to keep your equipment write-offs, avoid California’s unique pitfalls, and protect every dollar you’re owed.

This guide is current as of 10/19/2025. Tax laws change quickly—verify all detail with the IRS or FTB before making any move.

Quick Answer: What Changed With Bonus Depreciation In 2025?

For the 2025 tax year, the federal bonus depreciation rate dropped to 60%. This means that the immediate expensing benefit is sharply limited compared to previous years. If you’re in California, the state never conformed to the federal bonus depreciation rules—even when 100% first-year deductions were allowed. Now, both IRS and Franchise Tax Board (FTB) enforcement is stricter on qualification and reporting. If you miss the proper timing, placement-in-service rules, or over-apply the benefit, you’re out of luck (and on the hook for thousands in disallowed deductions). See IRS Publication 946 for the latest depreciation changes.

Under the bonus depreciation income limitation 2025, the IRS now restricts how much depreciation can offset active income in a single year when your deductions exceed your taxable business profit. High earners hitting passive loss or at-risk basis limits can find portions of their deduction suspended until future years. This means you can’t always “zero out” your income through bonus depreciation alone—especially if your business operates through a partnership or S Corp with multiple owners. (See IRC §179(b) and Publication 946 for income limitation details.)

Smaller First-Year Write-Offs: Why the Bonus Depreciation Drop Hurts In 2025

Contrary to what many business owners believed in 2022, the depreciable value you can expense immediately for eligible equipment, vehicles, and improvements is NOT the same in 2025. For qualifying purchases placed-in-service this year, bonus depreciation offers only 60% of the item’s cost—down from 80% in 2023 and 100% before that. The rest must be depreciated over future years, creating cash flow delays most taxpayers never planned for:

• Example 1: Real estate developer buys $150,000 of new construction equipment in January 2025. In 2022, $150K could be fully expensed. For 2025, they get only $90,000 bonus depreciation, then must spread $60K over the asset’s useful life via MACRS.
• Example 2: LLC consulting firm upgrades computers for $50,000. Only $30,000 is eligible for immediate bonus depreciation in 2025. The balance ($20,000) is recovered slowly—leaving owners facing a bigger taxable profit this year.

If you typically plan big purchases based on “full-write-off” logic, the 2025 rule change can mean an unexpected $20K–$80K in extra taxable income—plus state tax, payroll tax, and estimated tax increases to match.

KDA Case Study: Business Owner Faces 2025 Bonus Depreciation Shock

Persona: LLC owner, small construction business, $940,000 gross revenue
Situation: In late 2024, this client purchased $220,000 in new heavy equipment to capitalize on the expiring 80% bonus depreciation rate. However, delivery delays meant the bulk of equipment was placed in service in January 2025—right when the rate dropped to 60% federally (and zero in California). On their own, the client assumed they could take a $176,000 deduction (80% of $220K), as in past years.
What KDA Did: We performed a placement-in-service analysis and flagged that only $132,000 (60%) qualified for first-year bonus depreciation in 2025; $88,000 had to be depreciated over time. We adjusted estimated tax payments, used Section 179 strategically to make up part of the gap, and counseled the owner about the limitations on California state returns.
Results: Proper planning prevented a $28,000 underpayment penalty, and allowed the owner to optimize cash flow, reinvest wisely, and stay compliant for both IRS and FTB. KDA’s intervention turned what could have been a cash crisis into a controlled and fully-auditable deduction stack.
Fee Paid: $4,000, leading to a first-year savings of $19,700 net—4.9x return on investment.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Why California Owners Are Hit Hardest—And State Rules You Can’t Ignore

Many business owners are shocked to learn that California still does not conform to federal bonus depreciation. The state recognized none of the temporary, more generous write-off rules Congress passed since 2017. For the 2025 return, you must make federal and state depreciation calculations separately—and if you get it wrong, you risk a Franchise Tax Board bill for thousands.

• California continues to require slower, traditional MACRS depreciation (see FTB Form 3885 for property placed in service in 2025).
• Section 179 expensing is capped at $25,000 (far below federal limits) and phases out quickly as business income rises.
• Bonus depreciation remains zero for California—meaning big differences in net income between IRS and FTB records.

Red Flag Alert: If your accountant blindly copies federal returns to your California forms, you’re likely overstating deductions—and inviting audit. State compliance is a must for every “big ticket” asset.

For more detail on blending federal and state write-off strategies, review our California Business Owner Tax Strategy Hub (2025 Edition).

• What If My CPA Used Bonus Depreciation on My State Return?
  Ask them immediately to review and amend your FTB filings. California will disallow the deduction and add penalties.
• Can I Just Write Off the Asset Another Way?
  You may be able to use Section 179 for the first $25,000—but everything else must follow MACRS rules. Always coordinate timing and documentation for both IRS and FTB compliance.

The IRS Placement-in-Service Standard: Timing Matters More Than Ever

Here’s the little-known fact about bonus depreciation: it only applies if the asset is “placed in service” (fully ready and available for business use) during the tax year. Too many business owners assume purchase date equals deduction date—when, in reality, shipping delays, backorders, or incomplete installation can cost you the bigger write-off. IRS audit activity is ramping up around aggressive timing claims in 2025.

• Scenario: Medical practice buys $40,000 X-ray machine in December 2024, but installation isn’t complete until February 2025. Only the 60% bonus depreciation rate for 2025 applies, and California won’t allow any bonus at all.
• Strategy Tip: Push vendors to complete delivery and set-up before December 31, or plan on multi-year depreciation. Document status with photos, invoices, and operation logs.

See the detailed requirements in IRS Publication 946.

• Can I Accelerate Deduction With Section 179?
  For small to mid-sized purchases, IRS Section 179 lets you expense up to $1,220,000 federally in 2025, subject to income limits and phaseouts. However, California restricts this to $25,000—and you must have net profit to qualify.
• What Types of Property Qualify?
  Tangible property like equipment, computers, vehicles, certain building improvements, and office furniture usually qualify. Real property/depreciation rules are more restrictive.

Common Mistakes With Bonus Depreciation Income Limitation 2025

Owners continue to lose tens of thousands by assuming the old “100% bonus” logic applies. Here’s how to avoid traps:

1. Failing to Match Purchase and In-Service Dates: If your equipment is delivered in 2024 but installed in 2025, you follow the 2025 rules—losing up to 40% of anticipated deductions. Always verify your asset’s operational status before year-end.
2. Ignoring State/Federal Disconnect: Your CPA should run separate depreciation schedules for federal and California returns. If they use the IRS schedule for both, you’ll be flagged automatically for audit by the FTB.
3. Poor Documentation: The IRS and FTB are demanding receipts, delivery confirmation, and proof of business use. “Intent to use” documentation is not enough when scrutinized.
4. Missing Section 179 Optimization: Combine Section 179 with bonus depreciation for the optimal mix. Use 179 up to the limit, then bonus-depreciate the remainder.

Red Flag Alert: Owners who adopted aggressive “full bonus” write-offs in prior years are a primary target for IRS review in 2025—keep records tight.

Turning the Limitation Into Strategy: What High Earners and Real Estate Pros Do Differently

Top operators use the new limitations as a strategic planning tool—not just an expense to swallow. Here’s what works in 2025:

• Timing Purchases With Multi-Year Plans: Instead of dumping cash into year-end spending, plan out asset purchases when your income is highest, or when you can absorb phased deductions without hurting cash flow.
• Stacking Section 179 and Bonus Depreciation: Leverage Section 179 up to the federal (or California) limit, then use bonus on the remainder for max immediate expensing—always following income and basis restrictions per IRS Publication 946.
• Cost Segregation for Real Estate: For property investors, use a cost segregation study to break out short-life assets, claim bonus depreciation on eligible components, then lean on MACRS for the rest—with precise year-by-year tracking. See our Cost Segregation Services for more.
• Monthly Bookkeeping Tune-Ups: With depreciation schedules growing more complex, regular check-ins with a tax advisor are essential. Annual “catch up” accounting is no longer enough if you want to keep every write-off possible.

Pro Tip: If you’re considering a major equipment purchase but aren’t sure how to structure the deduction for maximum impact, schedule a strategy session with a KDA advisor now—before the asset is delivered.

FAQs: Navigating Bonus Depreciation in 2025

• How do I document placement-in-service for the IRS?
  Maintain delivery records, installation contracts, serial number registration, and operational logs for all major purchases. Take photos of the asset in use, and keep these with your business tax records for at least seven years.
• Can I carry forward unused bonus depreciation?
  Bonus depreciation itself cannot be carried forward, but any loss created may be carried forward. Consult your CPA to coordinate carryover with California’s rules, which are stricter than the IRS.
• Is used equipment eligible for bonus depreciation in 2025?
  Yes, as long as it is new to you (not previously owned by your business or affiliates) and otherwise qualifies under the relevant asset categories.
• What are the penalties for claiming ineligible bonus depreciation?
  Disallowed deductions, interest, and accuracy-related penalties of up to 20% on understated tax can apply. The FTB may assess additional penalties for nonconformity or misreporting.
• Should real estate investors still consider bonus depreciation?
  Absolutely—but it must be planned in tandem with a cost segregation study and matched to income strategies. Contact an expert for state-specific advice before making any large investment.

Summary: Don’t Let a Technicality Kill Your 2025 Write-Offs

The bonus depreciation income limitation 2025 isn’t small print—it’s a fundamental change that hits the profit margins of every California business buying equipment, vehicles, or improvements this year. Use proactive planning, schedule asset deployment carefully, coordinate IRS/FTB filings, and combine immediate expensing tools for the best results. Half-steps and copy-paste accounting will get you burned.

For support with recordkeeping, asset timing, or entity advisory—review our KDA Tax Services to see how expert guidance pays for itself.

Book Your Bonus Depreciation Strategy Session

If you’re planning major asset purchases or facing confusion over 2025’s new limits, this is the time to act. Book a personalized session with a KDA strategist to ensure your deductions are coordinated, compliant, and maximized. Don’t risk a five-figure tax mistake—instead, drive every dollar of deduction you’re owed through smart planning.
Book your 2025 Tax Strategy Session now and take control of your cash flow before year-end.