Bonus depreciation for AI data center equipment

In short

The One Big Beautiful Bill Act permanently restored 100 percent additional first year depreciation, often called bonus depreciation, for qualified property acquired and placed in service after January 19, 2025. IRS Notice 2026-11 For an AI data center, this covers servers, GPUs, networking gear, power distribution units, cooling equipment, and other building components that a cost segregation study can reclassify to shorter recovery periods. There is no dollar cap on the deduction, and it can create or increase a net operating loss. When the property is later sold, the bonus depreciation is recaptured as ordinary income. Several states do not follow federal bonus depreciation and require a separate depreciation schedule. COST, Del. Div. of Revenue, DC OTR

What changed in 2025? Permanent 100 percent bonus became law

Before the One Big Beautiful Bill Act, the Tax Cuts and Jobs Act phased down bonus depreciation each year. The rate was 60 percent for 2024, 40 percent for 2025, 20 percent for 2026, and zero for 2027 and later. IRS Notice 2026-11 The OBBBA, signed July 4, 2025, rewrote the rule. Section 70301 made 100 percent bonus depreciation permanent for property acquired after January 19, 2025 and placed in service after that date. IRS Notice 2026-11 There is no expiration. The old phase-down still applies to property acquired on or before January 19, 2025, even if you place it in service later.

For an AI data center project that starts after January 19, 2025, you can deduct 100 percent of qualifying equipment and building components in the first year.

What qualifies for 100 percent bonus depreciation in an AI data center?

Qualifying property includes tangible property with a Modified Accelerated Cost Recovery System (MACRS) recovery period of 20 years or less. IRC §168(k)(2)(A)(i) MACRS is the tax system that assigns a number of years over which you normally deduct the cost of an asset. The shorter the recovery period, the faster you deduct.

In an AI data center, a lot of equipment that looks like part of the building qualifies as short-lived property. The table below shows typical recovery periods and examples.

Sources include equipment classification and recovery periods from Senecacostseg.com and Qualified Improvement Property definition from IRC §168(e)(6).

Computer software that you depreciate under Section 167(f)(1) also qualifies. IRC §168(k)(2)(A)(i)(II) For an AI data center, that includes operating system software, virtualization platforms, and management software that is not off-the-shelf.

Used property can qualify for bonus depreciation if you did not use it before and you did not acquire it from a related party or in a carryover basis transaction. IRC §168(k)(2)(E)(i) So buying used servers from a third party qualifies. Moving equipment from your own existing facility does not.

The structural shell, foundation, and roof remain 39-year property and get no bonus. That is why cost segregation matters.

How cost segregation turns building costs into bonus eligible property

A cost segregation study is an analysis that allocates the total cost of property into the appropriate property classes and recovery periods to properly compute depreciation deductions. IRS Publication 5653 The IRS Cost Segregation Audit Techniques Guide identifies the detailed engineering approach from actual cost records as the most methodical and accurate approach, but notes that the IRS has not established any requirements for the preparation of cost segregation studies. Rule of thumb approaches are viewed with caution. IRS Publication 5653

For AI data centers, cost segregation typically reclassifies 20 percent to 40 percent of total construction costs into 5-year, 7-year, or 15-year property. Senecacostseg.com That is higher than the commercial-building average of about 24 percent, because these facilities pack in so much specialized infrastructure.

Take a $10 million AI data center project that qualifies for the post January 19, 2025 rate. Under standard 39-year depreciation, the first year deduction is about $256,000. With a cost segregation study and 100 percent bonus on the reclassified portion, the first year deduction jumps to $3 million to $4 million. At a 35 percent effective tax rate, that generates $1,050,000 to $1,400,000 in federal tax savings. Senecacostseg.com

Here is how the numbers can look on a $25 million project, based on a published cost segregation analysis. Cost Segregation Case Studies

The $13 million in bonus-eligible property generates a first year deduction of $13 million. At a 35 percent tax rate, that saves about $4.55 million in the first year. Without bonus, regular depreciation would yield only about $2 million in first year deductions and spread the rest over the assets’ five, seven, and fifteen year schedules.

Servers, GPUs, and other IT equipment are usually handled as separate personal property outside the real property cost segregation study. Senecacostseg.com They are also 5-year property and qualify for 100 percent bonus.

Does your property qualify? The binding contract and self construction rules

The OBBBA’s 100 percent rate applies only if the property was acquired after January 19, 2025 and placed in service after that date. IRS Notice 2026-11 The regulations define the acquisition date carefully.

For purchased property, the acquisition date is the later of four dates. They are the date you enter into a written binding contract, the date the contract is enforceable under state law, the date all cancellation periods end, or the date all contingencies are satisfied. IRS Notice 2026-11, §2.03(2)(b) A written binding contract is enforceable under state law and does not limit damages to a specified amount. Treas. Reg. §1.168(k)-2(b)(5)(iii)

If you signed a binding contract for servers on January 15, 2025, those servers are not eligible for the 100 percent rate. They follow the TCJA phase-down schedule instead, which is 40 percent for property placed in service in 2025 and 20 percent for 2026.

For self constructed property, you are treated as having acquired it when physical work of a significant nature begins. The regulations include a 10 percent safe harbor. If you pay or incur more than 10 percent of total expected costs (excluding land and preliminary activities like planning) on or before January 19, 2025, the project is treated as having begun construction before the cutoff. Treas. Reg. §1.168(k)-2(b)(5)(iv)(B)(2), Notice 2026-11 Then the entire project is subject to the TCJA phase-down.

There is an important election that can help. The component election under Treas. Reg. §1.168(k)-2(c)(6) lets you treat later acquired or later constructed parts of a larger project as separately qualifying for 100 percent bonus, even if the overall project began construction on or before January 19, 2025. IRS Notice 2026-11 For example, if you started site work in December 2024 but did not order the UPS systems until February 2025, you can still claim 100 percent bonus on the UPS systems. You make the component election on your tax return.

The bottom line, track your contract dates and construction spending carefully. The exact date a contract became binding or the 10 percent threshold was crossed determines whether millions of dollars in deductions are available now or phased down.

Elections, opting out or choosing a lower rate

You are not required to claim bonus depreciation. You can elect out of it for an entire class of property placed in service during the tax year. IRS Additional First Year Depreciation FAQ The election is made on Form 4562. You might elect out if you expect to be in a higher tax bracket later, you want to avoid net operating loss limitations, or you operate in states that decouple from federal bonus and want to reduce the state addback complexity.

The OBBBA also added a transitional election for the first tax year ending after January 19, 2025. You can elect to claim 40 percent bonus depreciation (instead of 100 percent) for that first year. IRS Notice 2026-11 The election is made on a timely filed return and is irrevocable without IRS consent. This can be useful if your taxable income is low and you want to preserve deductions for future years.

How Section 179 expensing fits with bonus depreciation

Section 179 is a separate expensing provision. For 2025, the OBBBA raised the maximum deduction to $2.5 million, with a phase-out beginning when total qualifying property placed in service exceeds $4 million. BDO, Tax analysis, SDO CPA, Tax planning analysis, Tax planning guide, Tax alert Section 179 applies to tangible personal property used in an active trade or business, so servers and GPUs qualify. However, Section 179 is limited to taxable income and cannot create a net operating loss. Bonus depreciation has no dollar cap and can create or increase an NOL. Bloomberg Tax

Many states that decouple from federal bonus depreciation still conform to Section 179. Tax Foundation, CrossLink For a multi-state AI data center operator, maximizing Section 179 for equipment can reduce state tax complexity, while still claiming bonus depreciation on building components that Section 179 cannot cover. The two provisions work together.

The recapture tax when you sell

When you sell property for which you claimed bonus depreciation, the IRS recaptures the depreciation as ordinary income, not as capital gain. For personal property (called Section 1245 property), all depreciation you claimed, including bonus, is taxed as ordinary income up to the amount of your gain. IRC §1245(a)(1), IRC §1(j)(2) The top federal ordinary income rate is 37 percent.

For example, suppose you buy a $10 million GPU cluster, claim 100 percent bonus depreciation so the tax basis becomes zero, and later sell it for $6 million. The entire $6 million gain is ordinary income because of recapture. The Tax Adviser, Data center cost segregation analysis If you had not claimed bonus depreciation, you would have a higher basis and less recapture. The deduction now is a timing benefit. The tax comes due on exit. Modeling the recapture is part of the overall deal.

State tax decoupling, where the rules diverge

Several states do not follow federal bonus depreciation. They require you to add back the federal bonus deduction and then deduct depreciation under a separate state schedule over the asset’s regular MACRS life. The states that decouple include California, New York, New Jersey, Illinois, Massachusetts, Pennsylvania (partial), Connecticut, Minnesota, Delaware, the District of Columbia, and major AI data center markets Florida, Georgia, Arizona, and North Carolina, each of which requires an addback of the federal bonus deduction and recovery over the asset’s regular life. COST State Conformity Chart for Section 168(k) California updated its conformity date to January 1, 2025, which is before the OBBBA, and continues to decouple. Delaware, Michigan, and Pennsylvania enacted legislation specifically decoupling from the OBBBA’s bonus provisions. KPMG, KPMG

By contrast, some states do follow federal bonus depreciation, such as Utah and Louisiana. Texas has no corporate income tax, but beginning with the 2026 franchise tax report, Texas follows federal bonus depreciation for cost of goods sold calculations. Texas Comptroller

This matters for site selection. A 100 percent federal deduction delivers cash flow, but if the state taxes that same income without the deduction, the effective state tax rate can be higher than expected.

Interactions with other tax provisions

Large bonus depreciation deductions can push a taxpayer into a net operating loss. NOLs arising after 2017 can only offset 80 percent of taxable income in a carryforward year. IRC §172 A big bonus deduction today may not yield an immediate refund if it creates an NOL that you cannot fully use.

The business interest deduction limit under Section 163(j) is 30 percent of adjusted taxable income. The OBBBA permanently restored the add back of depreciation, amortization, and depletion to the adjusted taxable income calculation for Section 163(j) purposes starting in 2025. That increases the base and can raise the interest deduction limit. Bonus depreciation reduces taxable income, but because the OBBBA restored the depreciation add-back in the Section 163(j) adjusted taxable income calculation, bonus depreciation does not reduce the interest deduction limit. RSM, Grant Thornton, Clark Nuber

The Section 179D energy efficient commercial building deduction can stack with bonus depreciation. For an AI data center that meets energy efficiency standards for interior lighting, HVAC, and building envelope systems and satisfies prevailing wage and apprenticeship requirements, you can deduct up to $5.81 per square foot under Section 179D as an additional first-year deduction. DOE 179D deduction guidance, IRS Energy Efficient Commercial Buildings Deduction

Practical steps to claim bonus depreciation

• Commission an engineering-based cost segregation study as soon as possible after construction is complete, ideally before you file the tax return for the placed in service year. The IRS expects you to identify the property components correctly on the original return. If you missed bonus depreciation, you can correct it by filing an amended return or Form 3115 (Change in Accounting Method). KBKG
• Track contract dates and construction spending from day one. Keep records that show exactly when a contract became binding, when physical work started, and when each component was placed in service. This supports the component election and the 10 percent safe harbor analysis.
• File Form 4562 with the return. On that form you claim the bonus depreciation on line 14. You also make any elections, including electing out or the transitional 40 percent election, by attaching a statement. IRS Form 4562, Form 4562 Instructions
• Work with a tax professional who understands both federal bonus rules and the state decoupling landscape, especially if the AI data center is in or serves multiple states.

Key takeaways

• Permanent 100 percent bonus depreciation is available for qualified property (which may include AI data center assets) acquired and placed in service after January 19, 2025. There is no expiration. IRS Notice 2026-11
• Servers, GPUs, power distribution units, cooling units, UPS systems, and qualified leasehold improvements all qualify. The structural shell does not. Recostseg.com
• A cost segregation study can reclassify 20 to 40 percent of a project’s construction costs into 5-year, 7-year, or 15-year property, multiplying the first year deduction many times over. Senecacostseg.com
• The binding contract date and the 10 percent safe harbor for self-constructed property are the gatekeepers. Plan contracts and spending to fall after January 19, 2025. Treas. Reg. §1.168(k)-2, Notice 2026-11
• The component election can salvage bonus eligibility for later parts of a project that started earlier. Track each system separately. IRS Notice 2026-11
• Section 179 offers up to $2.5 million in immediate expensing for equipment and is less likely to cause state addback problems. BDO
• When you sell, bonus depreciation is recaptured as ordinary income at rates up to 37 percent. Model the exit. IRC §1245, Rev. Proc. 2024-40 §2.01 (2025 tax rate tables)
• States including California, New York, and Illinois decouple from federal bonus. Factor the state tax addback into site and entity planning. Bassets

Frequently asked questions

Q:What is the cutoff date for 100 percent bonus depreciation under the OBBBA?

A:Property must be acquired after January 19, 2025 and placed in service after that date to qualify for the permanent 100 percent rate. IRS Notice 2026-11 Property acquired on or before that date follows the old TCJA phase-down schedule, even if placed in service later.

Q:Can I claim 100 percent bonus on servers and GPUs I buy for an AI data center?

A:Yes. Servers and GPUs are 5-year MACRS property under asset class 00.12 (Information Systems). They are qualified property eligible for 100 percent bonus depreciation when acquired after the cutoff date. Recostseg.com

Q:Does the building itself qualify for bonus depreciation?

A:The structural shell, foundation, load-bearing walls, and roof are 39-year property and do not qualify. IRS Publication 5653 However, many interior systems such as power distribution, cooling, and fire suppression can be reclassified to shorter recovery periods through a cost segregation study and then qualify.

Q:What is a cost segregation study and why is it necessary for my AI data center?

A:A cost segregation study is an engineering analysis that identifies building components that can be classified as 5-year, 7-year, or 15-year property instead of 39-year real property. The IRS has not mandated a specific methodology, but its Cost Segregation Audit Techniques Guide identifies the detailed engineering approach from actual cost records as the most methodical and accurate, and any reclassification must be supported by corroborating evidence. Without it, you lose the chance to accelerate depreciation on a large share of your construction costs. IRS Publication 5653

Q:Can I claim bonus depreciation on used equipment?

A:Yes, if the used equipment was not previously used by you and was not acquired from a related party or in a carryover-basis transaction. IRC §168(k)(2)(E)(ii) For example, purchasing used servers from an unrelated third party qualifies.

Q:What if I signed a contract on or before January 19, 2025 but the equipment is delivered later?

A:The acquisition date under the regulations looks at when the binding contract was entered into, not the delivery date. If the contract was binding on or before January 19, 2025, the property is not eligible for the 100 percent rate. It would follow the TCJA phase-down rate that applies in the year it is placed in service. IRS Notice 2026-11, §3

Q:How do I elect out of bonus depreciation?

A:You elect out by attaching a statement to your timely filed tax return, including Form 4562. The election applies to an entire class of property placed in service that year. IRS Additional First Year Depreciation FAQ Once made, the election is irrevocable without IRS consent.

Q:Does bonus depreciation apply at the state level?

A:Not in every state. Many states, including California, New York, and Illinois, decouple from federal bonus depreciation and require an addback. Other states, such as Florida, Georgia, and Arizona, do not conform to federal bonus depreciation, requiring taxpayers to add back federal bonus depreciation deductions at the state level. Bloomberg Tax, Florida DOR Always check the specific state rules for your project.

Q:What happens to bonus depreciation when I sell the AI data center or its equipment?

A:When you sell Section 1245 property (servers, GPUs, PDUs, cooling units, etc.), all depreciation you claimed, including bonus, is recaptured as ordinary income up to the amount of your gain. The top federal rate on that ordinary income is 37 percent. IRC §1245(a)(1)

Q:Can I combine bonus depreciation with Section 179?

A:Yes. You can claim Section 179 on some property (up to the $2.5 million limit for 2025) and claim bonus depreciation on other qualified property. They can be coordinated to balance immediate deductions, state tax conformity, and NOL limitations.

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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.