Section 179 & Bonus Depreciation — Deduct Business Equipment Immediately
What Is It?
Under normal tax rules, when a business buys equipment (computers, machinery, vehicles, furniture, software), it must depreciate the cost over several years — spreading the deduction over the useful life of the asset. Section 179 and Bonus Depreciation are two overlapping provisions that let businesses deduct the full cost of qualifying assets in the year of purchase instead, dramatically reducing taxable income immediately.
2025 Key Numbers:
- Section 179 deduction limit: $1,160,000 (phases out dollar-for-dollar above $2,890,000 in total property placed in service)
- Bonus Depreciation: 40% of the cost of qualifying property (down from 100% in 2022; phasing down 20% per year under TCJA — 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 unless extended)
These two provisions work together and stack — most businesses use Section 179 first, then Bonus Depreciation for amounts above the Section 179 limit.
Do I Qualify?
- You bought qualifying business property and actually placed it in service during the tax year
- The property is used more than 50% for business where that rule matters
- You understand whether the item fits Section 179, bonus depreciation, or both
- Your business income and state tax rules still make the immediate deduction strategy worthwhile
Qualifying Property
- Equipment and machinery (computers, printers, manufacturing equipment, tools)
- Business vehicles (see SUV limits below)
- Off-the-shelf software
- Qualified improvement property (improvements to the interior of non-residential buildings)
- Certain listed property (must be used more than 50% for business)
Does NOT qualify: Land, buildings themselves (the structure), property used outside the US, property acquired from related parties.
How It Works
Step 1 — Buy and place in service. The asset must be purchased and actually put into service during the tax year (i.e., available for business use — not just sitting in a box).
Step 2 — Elect Section 179. On Form 4562, elect to expense the cost under Section 179. You can elect it for some assets and not others.
Section 179 limitation: Your Section 179 deduction cannot exceed your net business income for the year. You can’t use it to create a loss. Unused deductions carry forward.
Bonus Depreciation has no income limitation — it can create or increase a loss, which may be carried back or forward.
Step 3 — SUV/Vehicle limits. Passenger automobiles (under 6,000 lb. GVWR) have luxury auto limits that severely cap depreciation (~$12,400 first year for most vehicles). However, vehicles over 6,000 lb. GVWR (many SUVs and trucks) are eligible for Section 179 up to $28,900 (2023 figure; adjust for current year) and Bonus Depreciation on the remainder. This is why business owners often buy heavy SUVs.
Step 4 — State conformity. Many states do not conform to federal bonus depreciation rules and require you to add back the bonus depreciation on your state return and depreciate normally for state purposes. Check your state before planning around bonus depreciation for state tax purposes.
What Most People Don’t Know
- Used property qualifies for Bonus Depreciation (post-2017 TCJA) — not just new equipment. This opens up significant planning opportunities for buying used machinery, vehicles, or equipment.
- Qualified Improvement Property (QIP) — improvements to the interior of commercial buildings (not the structural components) qualify for 15-year depreciation or immediate expensing under Bonus. This was a major CARES Act fix for a TCJA drafting error.
- You can take partial Section 179. If you don’t want to use the full deduction this year, you can elect a partial amount on any individual asset.
- Recapture risk. If you sell or stop using an asset in a later year, you may face depreciation recapture — the previously deducted amounts are taxed as ordinary income (Section 1245 recapture). Plan asset dispositions accordingly.
- Real property improvements can now qualify for Bonus Depreciation as QIP, a change that opened up significant opportunities for businesses that improve leased spaces.
Who Benefits Most?
Small businesses with significant equipment purchases — contractors, manufacturers, medical/dental practices, restaurants, farms, retail stores, and any business that has invested in computers, software, or vehicles. Especially valuable in high-income years when the tax rate on deferred income is high.
Legal Basis
- 26 U.S.C. § 179 — Election to expense certain depreciable business assets
- 26 U.S.C. § 168(k) — Bonus Depreciation (Special Depreciation Allowance)
- Tax Cuts and Jobs Act of 2017 (TCJA) — Expanded both provisions significantly; established the phase-down schedule
- CARES Act of 2020 — Fixed the Qualified Improvement Property classification
Frequently Asked Questions
What are the 2026 Section 179 limits?
For 2026, the Section 179 deduction limit is $2,560,000, phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000. The deduction is fully eliminated above $6,650,000 in total qualifying purchases.
Can I use Section 179 to create a tax loss for my business?
No. Section 179 is limited to your net business income for the year — you cannot use it to create or increase a net loss. Bonus Depreciation has no such income limitation and can be used to create or deepen a loss, which may then be carried back or forward to other tax years.
Does used equipment qualify for bonus depreciation?
Yes. The Tax Cuts and Jobs Act of 2017 extended bonus depreciation to used property, as long as the taxpayer has not previously used the property and did not acquire it from a related party. This opened up major planning opportunities for businesses buying used vehicles, machinery, or other equipment.
Why do business owners often buy heavy SUVs specifically for the Section 179 deduction?
Passenger vehicles under 6,000 lb. GVWR are subject to “luxury auto” limits that cap first-year depreciation at roughly $12,400. Vehicles over 6,000 lb. GVWR (many SUVs and trucks) are exempt from those caps and can be fully expensed under Section 179 up to applicable limits, then bonus depreciation applies to any remainder — making them far more valuable as a tax deduction in the year of purchase.
My state has its own income tax — does it conform to federal bonus depreciation?
Often not. Many states decouple from federal bonus depreciation rules and require businesses to add back the bonus depreciation on the state return and depreciate the asset normally over its useful life for state tax purposes. Section 179 conformity varies by state as well. Always check your specific state’s rules before planning around these deductions for state tax purposes.