Section 179 vs. Bonus Depreciation
how to write off equipment in 2026.
When you buy a piece of equipment for your business, you can deduct it slowly over its useful life — or you can take most of the deduction in year one. Section 179 and bonus depreciation are the two ways to do the latter. They look similar from the outside but have different caps, ordering rules, and a phase-down schedule that makes 2026 a meaningfully different year than 2022 was.
Section 179: Immediate Expensing With a Cap
Section 179 lets you expense the full cost of qualifying equipment in the year placed in service, up to a deduction limit. The 2025 limit is roughly $1.25 million, with the deduction phasing out dollar-for-dollar above ~$3.13 million in total purchases — both numbers index annually for inflation.
Two important constraints:
- Business income limit. Section 179 can't create or increase a tax loss. If your taxable business income is $400,000, you can take at most $400,000 of Section 179, even if the cap allows more. Excess carries forward.
- Election by asset. You choose which assets to apply Section 179 to and how much per asset. This flexibility matters when you mix equipment with different lives.
Bonus Depreciation: Percentage of Cost, No Income Cap
Bonus depreciation allows a percentage of the asset's cost to be expensed in year one, with the remaining basis depreciated normally under MACRS. Key differences from Section 179:
- No business income limit. Bonus depreciation can create or deepen a net operating loss.
- All-or-nothing by asset class. If you elect bonus depreciation, it applies to all assets in that MACRS class for that year unless you formally elect out of the class.
- Phasing down. The 100% bonus rate began phasing down in 2023 and is on a glide path to 0% in 2027 absent legislative changes.
The 2026 Phase-Down Schedule
Under current law (TCJA as enacted), bonus depreciation rates by tax year:
- 2022: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027 onward: 0%
Congress has repeatedly debated reinstating 100% bonus, and several proposals have moved through committee in 2025–2026. The phase-down is the law as written; changes would have to come through new legislation. Plan against the schedule, not the rumor.
Which Comes First
The IRS specifies the ordering: Section 179 is taken first, then bonus depreciation on the remaining basis, then MACRS depreciation on what's left. This matters for assets that exceed the Section 179 cap or for businesses that hit the income limit. Example, on a $2 million equipment purchase in 2026:
- Section 179: $1,250,000 (up to current cap, assuming sufficient business income).
- Bonus depreciation on remaining $750,000 × 20% = $150,000.
- Standard MACRS on remaining $600,000 — for a 7-year asset, ~$85,700 in year one.
- Total year-one deduction: ~$1,485,700 of $2,000,000.
Which Should You Use?
- Small purchases (under the 179 cap): use Section 179 for full first-year expensing without dealing with bonus rates.
- Large purchases above 179 cap: stack — 179 to the cap, bonus on the rest.
- Loss-creating purchases: bonus depreciation only; 179 can't take you below zero.
- Mixed-use vehicles (over 6,000 lbs GVWR): Section 179 has a separate, lower SUV cap (~$30,500 in 2025). Bonus depreciation has a different "luxury auto" limit. The interaction is the most-litigated part of equipment tax law — get a CPA involved.
Loan vs. Lease and the Tax Picture
If you finance the equipment, you can still take the full Section 179 or bonus deduction — the deduction is based on cost, not cash paid. This is why "Section 179 financing" sales pitches at year-end are technically accurate: a $100,000 piece of equipment financed in December still produces a $100,000 deduction in that tax year, even if you only paid $1,500 in down payment and one month of interest. The equipment financing calculator models loan vs. lease side-by-side with tax savings included.
Operating leases are treated as rent — fully deductible as paid, no Section 179 or bonus eligibility. Capital leases (a.k.a. $1 buyout leases) are treated as purchases for tax purposes and qualify for both.
Common Mistakes
- Buying in December but not placing in service. The deduction requires the asset to be in service by year-end — invoiced and delivered isn't enough if it's still in the crate.
- Forgetting state conformity. Many states don't conform to federal bonus depreciation (or conform partially). Your federal deduction may not match your state deduction.
- Treating Section 179 as risk-free. If you sell the equipment within the recovery period, you recapture the deduction as ordinary income.
Sources
IRC § 179 and § 168(k); IRS Publication 946 (How to Depreciate Property); Tax Cuts and Jobs Act of 2017 phase-down schedule (Pub. L. 115-97).