Section 179 and bonus depreciation are two separate tax provisions that let you accelerate equipment deductions. Used together, they can shelter substantial taxable income in the year of purchase. Understanding when to use which (or both) is the strategy question.
The two provisions side by side
| Feature | Section 179 | Bonus depreciation |
|---|---|---|
| 2025 limit | $1,250,000 | 40% of remaining basis |
| 2026 limit (current law) | Limit adjusts annually | 20% (phasing down) |
| 2027 limit | Annual adjustment | 0% (current law) |
| Income limitation | Cannot exceed taxable income | Can create a NOL |
| Election | Per-property choice, can be partial | Applies automatically to qualifying property unless opted out |
| Qualified property | Tangible personal property + some QIP | Same as Section 179, more types qualify |
| Used property | Eligible (since 2018) | Eligible (since 2018) |
| Phase-out | Begins at $3.13M of qualifying purchases | None |
The default order
For most taxpayers, the optimal stacking order is:
- Section 179 first – up to the annual limit, or up to taxable income
- Bonus depreciation second – applies to remaining basis after Section 179
- MACRS depreciation third – applies to whatever basis remains
Most equipment qualifying for both can be fully expensed in year 1 through a combination of the two.
When to skip Section 179 in favor of bonus
Section 179 has the income limitation – cannot exceed taxable income before the deduction. Bonus depreciation has no income limit; it can create a net operating loss (NOL).
Scenario: Construction company has $400,000 taxable income before equipment deduction. Buys $700,000 of equipment.
Option A: Section 179 first. Section 179 deducts $400,000 (capped at taxable income). Bonus depreciation deducts 40% of remaining $300,000 = $120,000. Total deduction: $520,000. Taxable income: $0. Remaining basis: $180,000 to depreciate via MACRS over 5-7 years.
Option B: Skip Section 179, use bonus + MACRS. Bonus depreciation deducts 40% of $700,000 = $280,000. MACRS deducts (varies by year, roughly 20% first year of remaining $420,000) = $84,000. Total deduction: $364,000. Taxable income: $36,000. Future depreciation continues over 5-7 years.
Option A produces $0 taxable income in current year; Option B leaves $36,000 taxable. Option A wins.
However, if Option A creates a loss that cannot be used (no other income to offset), the unused portion carries forward. Bonus is better in scenarios where you do not need the deduction now and want to bank it for future years.
When to use Section 179 strategically less
Multi-year smoothing. If you expect higher taxable income next year, taking less Section 179 now leaves more depreciation for future years.
State conformity. Some states cap Section 179 below the federal limit. New York, New Jersey, California, Pennsylvania, and others decouple to varying degrees. State tax may favor a different allocation.
Phase-out concerns. If you are buying over $3.13M of qualifying property in 2025, Section 179 phases out dollar-for-dollar. Above $4.38M, no Section 179 is available.
Quasi-non-cash deduction value. Section 179 reduces taxable income, but if your effective tax rate is low (10% to 15%), the cash value of the deduction is small. Compare against the cost of accelerating the deduction (interest on the financed equipment vs the deduction’s present-value benefit).
What property qualifies
Both Section 179 and bonus depreciation cover:
- Equipment, machinery, vehicles (with luxury auto limits)
- Computer software (off-the-shelf)
- Qualified Improvement Property (interior building improvements)
- Used equipment (acquired from unrelated party)
Does NOT qualify:
- Equipment used 50% or less for business
- Buildings (real property)
- Land
- Inventory
- Equipment acquired from related parties (for Section 179)
Worked example
Manufacturing business in 2025. Taxable income before equipment: $1,800,000. Buys $900,000 of new CNC equipment.
Step 1: Section 179. Limit: $1,250,000. Equipment: $900,000. Income limit: $1,800,000. Take full $900,000 Section 179.
Step 2: Bonus depreciation. Remaining basis: $0. Nothing for bonus to apply to.
Step 3: MACRS. Nothing left to depreciate.
Total year-1 deduction: $900,000. Taxable income after: $900,000.
Tax savings (at 24% marginal): roughly $216,000.
Combining with financing
Equipment financed with a loan still qualifies for the full deduction. The loan does not reduce the basis. You can:
- Put $0 down on the equipment
- Take 100% Section 179 in year 1
- Use the tax savings as effectively a return on no cash outlay
This is why equipment financing is often called “non-dilutive growth capital.”
Year-end timing
To claim either deduction in tax year 2025, equipment must be placed in service by December 31, 2025. “Placed in service” = ready and available for use, not just delivered or ordered.
For complex equipment requiring installation, plan delivery 6 to 8 weeks before year-end to allow setup time. See year-end equipment purchase.
Common mistakes
Forgetting state conformity. Federal optimal may not be state optimal. Talk to your CPA about state implications.
Not opting out of bonus when beneficial. You can elect out of bonus depreciation on a class-by-class basis. Sometimes it makes sense to preserve future-year deductions.
Buying equipment you do not need for the deduction. A $200,000 Section 179 deduction at 24% saves $48,000 in tax. It does not save the $152,000 of equipment cost you did not need.
Missing the 50%-business-use requirement. Equipment used personally over 50% of the time loses Section 179 eligibility and may face recapture.
What the IRS expects
Documentation supporting the Section 179 or bonus depreciation claim:
- Form 4562 attached to your tax return
- Equipment invoice or purchase contract
- In-service date documentation
- Business-use percentage support
- Equipment description for the depreciation schedule
Action steps
- Talk to your CPA before buying equipment in Q4
- Confirm your projected taxable income for the year
- Decide whether full Section 179 or partial Section 179 + bonus is optimal
- Confirm state conformity implications
- Plan delivery and installation to meet the December 31 placed-in-service deadline
- Apply for financing if you need it; financed equipment still qualifies
This guide is general; consult your accountant for specifics on your situation.