Many manufacturers decide at year-end whether to buy the next machine now or wait. The 2025 federal tax law made the federal answer more generous than it has been in years. California did not follow, so the same purchase can look very different on your two returns.
Federal: 100 percent bonus depreciation is back
Public Law 119-21, enacted July 4, 2025, restored a permanent 100 percent bonus depreciation deduction for qualified property acquired after January 19, 2025 (IRC §168(k)). The IRS issued interim guidance in Notice 2026-11.
- What qualifies. Generally, tangible property depreciated under MACRS with a recovery period of 20 years or less, which can include machinery and equipment (Instructions for Form 4562).
- Used equipment can count. A used machine may qualify if, among other requirements, you or a predecessor did not use it before and you did not buy it from a related party (Treas. Reg. §1.168(k)-2(b)(3)(iii)).
- The acquisition date matters. Equipment bought under a written binding contract is generally treated as acquired when the contract is entered into, so a machine ordered under a binding contract signed before January 20, 2025 generally does not get the 100 percent rate. Equipment you build yourself is generally acquired when physical work of a significant nature begins (Notice 2026-11).
- You can elect out. You may elect out of bonus depreciation for any class of property placed in service during the year (IRC §168(k)(7)). A separate election to take 40 percent instead of 100 percent applied only to the first tax year ending after January 19, 2025 (IRC §168(k)(10)), so it does not reach equipment placed in service this fall.
Section 179: choosing asset by asset
Section 179 lets you expense the cost of qualifying property you select, up to a limit. For tax years beginning in 2026, the limit is $2,560,000, reduced dollar for dollar once the cost of Section 179 property placed in service during the year exceeds $4,090,000 (IRC §179(b); Rev. Proc. 2025-32).
Two features set it apart:
- You choose the assets and amounts, so you can aim the deduction where it helps most.
- It is limited to business income. The deduction cannot exceed your taxable income from the active conduct of a trade or business, and any disallowed amount carries forward (IRC §179(b)(3)).
A new option for production buildings
Nonresidential buildings are normally recovered over 39 years (IRC §168(c)). The 2025 law added an elective 100 percent deduction for “qualified production property” (IRC §168(n)). Under the IRS’s interim guidance in Notice 2026-16, with proposed regulations still to come:
- Production space only. Only space used as an integral part of manufacturing, production, or refining that substantially transforms tangible personal property qualifies. Offices, administrative space, parking, sales, research, software development or engineering, and finished goods storage do not.
- Firm dates. Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service after July 4, 2025 and before January 1, 2031.
- Limited room for used buildings. A building you buy rather than build may qualify only in limited cases, including that no one used it in qualified production from January 1, 2021 through May 12, 2025.
- A binding election. It is made on a statement attached to a timely filed original return and generally cannot be revoked.
- Recapture risk. If the space leaves qualified production within 10 years, part of the deduction may be recaptured as ordinary income.
- Landlords. A lessor generally does not qualify for space a tenant uses, with limited exceptions for certain commonly controlled tenants.
The notice allows a reasonable method, such as square footage or cost segregation data, to split qualifying and nonqualifying space, so the detail behind a cost segregation study may help.
California: same machine, different answer
California conforms to federal law as of January 1, 2025 (SB 711, enacted October 1, 2025), before the 2025 federal law. The Franchise Tax Board lists both §168(k) bonus depreciation and the §168(n) election as areas where California does not conform (Instructions for FTB 3885 and FTB 3885A).
- No bonus depreciation. The machine is depreciated under California’s own rules.
- A much smaller Section 179. California allows up to $25,000, reduced once Section 179 property placed in service during the year exceeds $200,000 (R&TC §17255; Instructions for FTB 3885). Once qualifying purchases reach $225,000 in a year, the California deduction is gone.
- Different methods for C corporations. California does not follow federal MACRS for corporations (Instructions for FTB 3885), so even regular depreciation can differ.
The result is two depreciation schedules for one asset: a federal deduction that may come all at once, and a California deduction spread over years. Plan state estimated payments accordingly.
One California benefit works at the point of purchase: qualifying manufacturers may claim a partial sales and use tax exemption on qualifying equipment by giving the seller a certificate (R&TC §6377.1; form CDTFA-230-M).
“Placed in service” sets the year
The deduction belongs to the year the property is placed in service, meaning ready and available for its specific use, not the year you pay or take delivery (IRS Publication 946). In its example, a machine delivered in one year but not installed and operational until the next is placed in service in the second year.
For a December purchase, installation, power, tooling, and setup should be done by year-end, with records showing when the machine was ready.
Financing changes cash, not the deduction
Your cost basis generally includes amounts paid with borrowed money or other debt obligations (IRS Publication 946), so a financed machine can produce the same deduction as one bought with cash. The difference is cash: the tax benefit arrives when you file, while loan payments continue for years, and principal is not deducted a second time. Leases need a closer look, since the terms decide whether one is treated as a purchase for tax purposes. Our cash flow calculator can show how new payments fit month by month.
Why the biggest deduction is not always the best
- Future income. A deduction is worth more in a year taxed at a higher rate. If you expect income to rise, an election out or a smaller Section 179 amount may fit better.
- Losses. A deduction larger than your income may create a loss that carries forward instead of reducing this year’s tax.
- California. Your state tax will not fall the way your federal tax does.
- Selling later. When expensed equipment is sold, gain up to the depreciation or Section 179 deduction taken is generally ordinary income (IRC §1245).
- The business case. A deduction returns only part of the cost. The machine still has to pay for itself through capacity, margin, or pricing.
How TreeStar can help
TreeStar works with manufacturers on year-end tax planning, fixed asset and depreciation records that track federal and California figures side by side, and federal and California returns. Before you buy, we can model how each option affects both returns. Our tax planning service is built for decisions like these.
This article is general information, not advice for your situation. Rules change; confirm current law before acting.
