If you’re a contractor and you’re planning to buy equipment, the tax rules have recently changed in your favor. With the passing of the OBBBA back in July 2025, you now have the opportunity to write off the full cost of both new and used equipment immediately instead of deducting it over years. Here’s what that means for your business and why you should care.
What Changed: The Basics
For the past several years, contractors had access to something called “bonus depreciation,” but it was getting worse each year. In 2024, you could write off 60% of equipment costs in year one. In 2025, that was supposed to drop to 40%, then 20% in 2026.
Now, you can deduct 100% of qualifying equipment costs in the year you buy it.
How This Compares to the Old Ways
Before this change, contractors had a few options, none of them as good as what’s available now.
Traditional Depreciation (MACRS) was the baseline. You’d buy a $50,000 truck and deduct $10,000 per year over 5 years. Slow, spread out, and your tax benefit comes years down the road.
Bonus Depreciation (the old way) gave you a bigger deduction in year one, but you were still limited. In 2024, you got 60% of the cost. The remaining 40% would depreciate over years. Not ideal, but still better than traditional depreciation.
Section 179 is another option. Thanks to the OBBBA, you can now immediately expense up to $2.56 million in 2026 (the limit changes yearly and is indexed for inflation). But Section 179 comes with restrictions: it phases out dollar-for-dollar once you exceed $4 million in equipment spending, and it has more rules about what qualifies. However, it does cover certain building improvements, which Bonus Depreciation does not.
Now, with the change in legislation: You get 100% of the cost deducted immediately.
Let’s put this in real numbers. Say you bought $100,000 in equipment in 2024:
- Under the old 2024 rules: You’d get 60% bonus depreciation = $60,000 deduction in year one, plus the remaining $40,000 would depreciate over the asset’s useful life (typically 5 years for most equipment).
- Under the new OBBBA rules today: You get a $100,000 deduction in year one. Assuming a 25% tax bracket, that’s the difference between a $15,000 tax savings in year one versus a $25,000 tax savings.
Assuming a 25% tax bracket, that’s the difference between a $15,000 tax savings in year one versus a $25,000 tax savings.
What Equipment Actually Qualifies?
Not everything you buy for your business qualifies, so it’s important to know the rules.
Equipment that qualifies:
- Work vehicles over 6,000lbs (trucks, vans, equipment haulers)
- Machinery and tools (compressors, power saws, nail guns, generators)
- Computers and business software
- Professional equipment specific to your trade
What does NOT qualify:
- Land
- Inherently permanent structures (e.g. main structure, roofing, HVAC systems)
- Vehicles used for personal purposes
- Equipment you already own and depreciated in previous years
- Equipment obtained through an operating lease
The key timing requirement: The equipment must be both acquired and placed in service after January 19, 2025. “Placed in service” means you actually buy it and start using it for your business. The actual start date is when you begin using it, not necessarily when you purchase it.
What to Look Out For
While this change introduces some great tax-saving opportunities, there are some things you want to keep in mind:
Can You Actually Use the Loss?
Unlike other deductions, Bonus Depreciation can push your business into a “tax loss” that might be used to offset income from other sources. However, if you run an S-Corp or Partnership, claiming that loss on your personal return isn’t automatic. You have to clear a few hurdles: you must have enough “Basis” (skin in the game), you must be personally “At-Risk” for the debt (e.g., you personally guaranteed the equipment loan), and you must materially participate in the business (meaning you aren’t just a passive investor). If you’re 100% financed on a non-recourse loan and haven’t put your own cash in, that huge deduction might get “stuck” at the corporate level and carried forward to next year.
The North Carolina “Add-Back”
Since we’re here in North Carolina, we have a unique hurdle. While the federal government lets you take 100% bonus depreciation now, North Carolina doesn’t play along. In NC, you’ll have to “add back” 85% of that bonus depreciation deduction on your state return and spread it out over the next five years. You still get the federal win, but don’t expect your state tax bill to disappear entirely.
Pro Tip for NC Contractors: This is where strategy matters. Unlike bonus depreciation, North Carolina does conform to federal Section 179 limits. A smart tax strategy is to maximize your Section 179 allowance first to completely bypass that annoying 85% state add-back, using Bonus Depreciation only for whatever equipment costs are left over.
The “Boomerang” (Depreciation Recapture)
Depreciation isn’t a permanent gift; it’s a timing shift. If you write off a $50,000 tractor today and sell it for $30,000 in three years, you have to pay taxes on that $30,000 as ordinary income. Think of it as a 0% interest loan from the IRS: great for cash flow now, but you have to settle up when the equipment leaves the fleet.
The QBI Trade-Off
If you are a pass-through entity (like an LLC or S-Corp), you likely take advantage of the 20% Qualified Business Income (QBI) deduction, which the OBBBA also made permanent. However, taking a massive 100% bonus depreciation deduction lowers your net business income, which in turn shrinks your QBI deduction. Sometimes, it’s actually better for your overall multi-year tax picture to write off the equipment slower to preserve your 20% QBI deduction each year. Your CPA should run the math both ways.
How to Actually Claim This on Your Tax Return
This is simpler than you might think, but it does require proper documentation and usually a CPA’s help.
Here’s the process:
- Track your equipment purchases with dates, costs, descriptions, and when you put each item in service
- Give this list to your CPA (or input it into tax software if you’re doing it yourself.)
- Your CPA files Form 4562, which is the official “Depreciation and Amortization” form where all depreciation deductions are reported
- The deduction flows to your Schedule C (if you’re a sole proprietor) or your business return, reducing your taxable income
The form itself is technical, but the input is straightforward: “Here’s what I bought, here’s what it cost, here’s when I bought it and started using it.”
Bottom line: Most contractors aren’t going to file this themselves. You’ll want a CPA or solid tax software to handle Form 4562 correctly. It’s worth getting help for this one.
Should You Claim This Deduction This Year or Wait?
This is a strategic question, and the answer depends on your situation.
It would be strongly encouraged to claim bonus depreciation in the year you buy the equipment if:
- Your business income is high enough to use the full deduction. If you’re making $200,000+ in profit and buying $100,000 in equipment, claim it this year.
- You want the cash flow benefit now. A lower tax bill this year means more money in your pocket to reinvest in your business.
- You’re in a profitable year. When your business is doing well, taking deductions now helps offset that income.
You might consider waiting (buying equipment in a later year) only if:
- Your current year income will be unusually low. If this year is slow and your profit is only $50,000, but you expect next year to be much better, you might prefer to delay equipment purchases so you can use the deductions when your income is higher.
For most contractors, the answer is simple: If you’re buying equipment and your business income supports the deduction, claim it in the year you buy it. You get the tax savings immediately, which helps with cash flow. There’s generally no benefit to waiting unless you have a specific reason to believe your income will be significantly higher next year.
What Documentation You Actually Need
Here’s where contractors often get sloppy—and where the IRS looks closest. You need to prove three things:
- You actually bought the equipment
- How much you paid for it
- When you bought it and when you put it in service
Keep these documents for each piece of equipment:
- Invoice or receipt from the vendor (showing cost, date, and what was purchased)
- Bank or credit card statement showing you paid for it
- Delivery receipts or photos showing when it arrived and went into use
- For vehicles, registration documents showing when you registered it for business use
You don’t need to physically attach every receipt to a tax form, but you should have them organized and available if the IRS ever asks.
Pro tip: Create a simple spreadsheet with columns for equipment name, purchase date, vendor, cost, date placed in service, and any notes. Take photos of big-ticket items in use. This takes maybe 30 minutes a quarter to maintain and saves you massive headaches later.
How long to keep it: At least 7 years. The IRS has up to 6 years to audit in some cases, so 7 years is the safe standard.
Why this matters: If you claim a $100,000 bonus depreciation deduction and can’t produce documentation, the IRS will disallow it. You’ll owe back taxes on the income you thought was deducted, plus interest, plus penalties. That $100,000 deduction you couldn’t prove could cost you $20,000-$30,000+ in back taxes and penalties.
But here’s the good news: If you have the documentation, you’re fine. The IRS rarely challenges straightforward equipment purchases when the paperwork is there.
The Bottom Line
The 100% bonus depreciation rule is one of the most contractor-friendly tax provisions available right now. If you’re buying equipment, this is a significant opportunity to reduce your tax bill and improve your cash flow.
The key is proper documentation and planning. Track what you buy, when you buy it, and when you put it in service. Then work with a CPA to claim it correctly on your tax return.
Have Questions About How This Affects Your Business?
If you’re a contractor with equipment purchases planned and you want to understand how these rules impact your specific situation, I’d love to help. Tax planning for contractors is more nuanced than it looks, and getting it right can mean thousands in savings.
Reach out to me at jorge@mcgriff-cpa.com if you have any questions! I’m here to help contractors navigate these changes and build a tax strategy that works for your business.