26 U.S.C. § 168(k) — Special Allowance for Certain Property

Plain-English summary

IRC §168(k) authorizes an additional first-year depreciation deduction on qualifying property, separate from and on top of the regular MACRS depreciation under §168(a). The deduction equals an “applicable percentage” of the property’s adjusted basis. The current percentage is 100% for property placed in service after January 19, 2025, restored permanently by the One Big Beautiful Bill Act § 70302(a).

For a strategy-oriented overview (qualifying components, cost segregation interaction, worked numbers), see the bonus depreciation hub. This page is the statute-level reference: subsection map, definitions, election mechanics, and citations.

Statute text — §168(k)(1)

The two operative rules: an additional first-year deduction equal to the applicable percentage (§168(k)(1)(A)), and a basis reduction so the same amount is not recovered twice (§168(k)(1)(B)).

Applicable percentage history

The “applicable percentage” in §168(k)(1)(A) has changed nine times since the provision was enacted in 2002:

The placed-in-service date controls — not the acquisition or contract date. Property acquired before but placed in service after January 19, 2025 uses the OBBBA 100% rate, unless the taxpayer elects to use the prior rate under the Notice 2025-17 binding-contract transition rule.

Subsection map

§168(k) is organized into ten subsections. Each addresses a distinct mechanical or definitional rule.

§168(k)(1) — Allowance

The operative grant of the additional deduction (statute text above).

§168(k)(2) — Qualified property

Defines “qualified property” subject to four tests:

1. Recovery period of 20 years or less under §168 (subsection (k)(2)(A)(i)(I)). This eliminates 27.5-year residential rental and 39-year nonresidential real property — they do not qualify directly. 5-year, 7-year, 10-year, 15-year, and 20-year property qualify.
2. Specific enumerated property classes — computer software (§167(f)(1)(B)), water utility property, qualified film/television/live theatrical productions (subsection (k)(2)(A)(i)(II)–(V)).
3. Acquisition test under §168(k)(2)(A)(ii): for property acquired post-Sept 27, 2017, used property qualifies if the taxpayer had no prior depreciable interest and the acquisition was not from a related party (§267 or §707(b)) or in a §351 transaction. Original-use property has always qualified.
4. Placed in service during the applicable period under §168(k)(2)(A)(iii). The placed-in-service test is when the property is ready and available for its intended use — not the acquisition or contract date.

§168(k)(2)(D) — Acquisition date rules

Provides the timing rules for binding written contracts and self-constructed property. For self-constructed property, the “acquired” date is when the taxpayer begins manufacture, construction, or production — relevant to property with extended construction periods.

§168(k)(3) — Qualified improvement property (QIP)

Cross-references §168(e)(6), which defines QIP as improvements to the interior of nonresidential buildings made after the original placed-in-service date. QIP is 15-year MACRS property and therefore qualifies for §168(k) bonus depreciation. (The original TCJA contained a scrivener’s error that inadvertently classified QIP as 39-year property; the CARES Act of 2020 corrected this retroactively.)

§168(k)(5) — Specified plants

Special election allowing bonus depreciation on certain plants in the taxable year planted or grafted rather than the year placed in service. Relevant to agricultural taxpayers.

§168(k)(6) — Applicable percentage table

Originally the phase-down schedule (80%/60%/40%/20%/0%) enacted by TCJA. Repealed and replaced by OBBBA § 70302(a)‘s permanent 100% rate.

§168(k)(7) — Election out

The election-out provision. A taxpayer may elect not to apply §168(k) to any class of property. The election is made on the original return for the placed-in-service year by attaching a statement identifying the class(es) being elected out of. The election is irrevocable absent IRS consent under Rev. Proc. 2015-13. Common context: a taxpayer expecting higher marginal rates in future years prefers MACRS depreciation distributed over the recovery period rather than concentrated in year 1.

§168(k)(9) — Exclusion of certain property

Property predominantly used in a trade or business that has had floor plan financing indebtedness (§163(j)(9)) does not qualify. Also excludes certain regulated public utility property.

§168(k)(10) — Special election for 2017

A taxpayer’s first taxable year ending after September 27, 2017 could elect to apply the pre-TCJA 50% rate to any property otherwise eligible for the 100% rate. Historical; rarely applied today.

Treasury Regulations — § 1.168(k)-2

The implementing regulations under TD 9993 (final, September 2020) and TD 9874 (proposed, September 2019) flesh out:

• § 1.168(k)-2(b)(2) — qualified property definitions, including the acquisition tests for used property and the binding-contract rules
• § 1.168(k)-2(b)(3) — placed-in-service rules, including self-constructed property
• § 1.168(k)-2(c) — special rules for like-kind exchanges and involuntary conversions: the §168(k) deduction is allowed only on the excess basis in the replacement property (the boot or new basis above the exchanged basis)
• § 1.168(k)-2(e) — the election-out procedure mechanics
• § 1.168(k)-2(f) — the partner basis rules for §704(c) property and §743(b) adjustments

Interaction with other Code sections

• §179 immediate expensing is applied before §168(k). §179 has dollar and taxable-income limits; §168(k) does not. Where both apply, the typical sequence is §179 to the cap, then §168(k) on remaining basis, then MACRS on whatever remains (often zero at 100% bonus).
• §168(a) MACRS depreciates whatever basis remains after §168(k). At a 100% rate there is generally no remaining basis to depreciate; the property is fully expensed in year 1.
• §168(g) ADS election overrides §168(k). Property depreciated under the Alternative Depreciation System is ineligible for bonus. A taxpayer that elects ADS under §163(j)(7)(B) (real property trade or business electing out of interest limitations) is locked out of §168(k) for ADS-classified property.
• §1245 recapture applies to depreciation taken under §168(k) on personal property (5-year, 7-year, 10-year) and on 15-year land improvements (which are §1245 property by reference to §168(e)(3)). Recapture is at ordinary income rates to the extent of accumulated depreciation on disposition.
• §469 passive activity rules are unaffected by §168(k) itself. §168(k) accelerates depreciation but does not change its character; passive losses remain subject to §469 limitations. Real estate professional status under §469(c)(7) and the short-term-rental exception under Reg. § 1.469-1T(e)(3)(ii) determine whether losses generated by §168(k) can offset active income.

Real-estate application — why cost segregation matters

§168(k)‘s 20-year recovery-period ceiling means direct real property does not qualify. A residential rental property (27.5-year) or office building (39-year) cannot take §168(k) on the building shell.

However, an engineered cost segregation study reclassifies a portion of the building’s basis into 5-year personal property, 7-year specialty property, and 15-year land improvements — all of which have recovery periods ≤20 years and therefore qualify for §168(k).

The typical reclassification on a residential rental: 18–28% of basis into 5-year, 2–5% into 7-year, 8–12% into 15-year. At 100% bonus, every dollar of that reclassified basis is deducted in year 1.

For a worked numerical example with first-year deduction totals, see the bonus depreciation hub.

Cost segregation studies and §168(k)

The interaction between §168(k) and cost segregation is what makes engineered studies financially material on real property. Without §168(k), a cost segregation study only reorders the timing of depreciation over the recovery period — it does not increase total deduction. With §168(k) at 100%, the reclassified basis is fully deductible in year 1, shifting deductions forward by 4–14 years per asset class. The present value of that timing shift, discounted at a real-estate investor’s typical 8–12% cost of capital, is what justifies the cost of a study.

This is also why §168(k) rate changes propagate so visibly through commercial real-estate investment underwriting. The 2023 phase-down to 80% reduced after-tax cash-flow projections by ~20% on a typical study; the OBBBA restoration to 100% restored that 20%.

State conformity

§168(k) is a federal statute. State conformity to §168(k) varies — roughly half of states fully conform (no addback), and roughly half decouple in some form:

• Full conformity: No state addback for §168(k); the federal deduction passes through to state taxable income.
• Full decoupling: State requires addback of the §168(k) deduction and recomputes state depreciation using straight MACRS over the recovery period without the bonus allowance.
• Partial decoupling: Some states permit a percentage of §168(k) (often 50% historically) or impose phase-in/phase-out timing different from federal.

This means a $250K federal §168(k) deduction may produce zero state benefit in a decoupling state, or full state benefit in a conforming state. The state-by-state analysis is material to cost-seg study ROI calculations, particularly in California, New York, Pennsylvania, and Illinois.

For state-by-state §168(k) conformity tables, consult the relevant state Department of Revenue guidance.

Filing mechanics

§168(k) is automatic — it applies by default to qualified property absent an election out. The deduction is reported on Form 4562, Depreciation and Amortization, Part II (Special Depreciation Allowance), line 14.

For property where §168(k) was not claimed in the year of placement, the taxpayer cannot recover the missed bonus depreciation on an amended return. Instead, the catch-up is treated as a change in accounting method under Form 3115 with automatic consent under Rev. Proc. 2015-13 (as updated by Rev. Proc. 2026-08). The catch-up amount is a §481(a) adjustment taken in full in the year of the change (favorable adjustments) or amortized over four years (unfavorable, but bonus depreciation catchup is typically favorable).

Sources

• Statute: 26 U.S.C. § 168(k) — Cornell LII; as amended by One Big Beautiful Bill Act § 70302(a) (January 19, 2025)
• Regulations: Treas. Reg. § 1.168(k)-2 (final, TD 9993, September 2020); TD 9874 (proposed, September 2019)
• IRS guidance: Notice 2025-17 (binding-contract transition); Rev. Proc. 2026-08 (automatic consent for late §168(k) elections); Notice 2026-12 (placed-in-service for binding contracts)
• Publications: IRS Pub. 946 — How to Depreciate Property (2025 OBBBA-incorporated edition); IRS Pub. 5653 — Cost Segregation Audit Techniques Guide
• Legislative history: Tax Cuts and Jobs Act § 13201 (2017); One Big Beautiful Bill Act § 70302 (2025)
• Form: Form 4562 — Depreciation and Amortization

Need to apply §168(k) to a specific property? The deduction depends on the property’s MACRS class, the placed-in-service date, and whether cost segregation has identified eligible components. A property-by-property worked calculation shows the year-1 §168(k) deduction alongside the underlying MACRS classification.