Section 179 vs. bonus depreciation for equipment

This guide explains how the rules work so you can model your options. It isn’t tax advice. Your tax preparer can confirm what applies to your business and your state.

The one-minute version

• Section 179 is an election to expense the cost of qualifying property instead of depreciating it. For tax years beginning in 2026 it’s capped at $2,560,000, reduced dollar for dollar once you place more than $4,090,000 of qualifying property in service in the year (IRS Rev. Proc. 2025-32). It can’t exceed your business taxable income; the excess carries forward.
• Bonus depreciation is an additional first-year depreciation allowance. Under the 2025 tax law (commonly called the OBBBA), it’s 100% and permanent for qualifying property acquired and placed in service after January 19, 2025. It has no dollar cap and no taxable income limit, so it can create a loss.
• For most small businesses buying equipment in 2026, both produce the same first-year deduction. The differences matter at the edges: large purchases, low-income years, state taxes, and flexibility.

Side by side

The taxable income limit: the difference that matters most

Section 179 can reduce business taxable income to zero, but not below. Suppose your business expects $60,000 of taxable income and buys a $100,000 machine:

• With Section 179, you can expense $60,000 this year. The other $40,000 carries forward to future years.
• With bonus depreciation, you deduct the full $100,000, creating a $40,000 loss that may offset other income or carry forward as a net operating loss, subject to its own rules.

That’s why our calculator asks whether you expect enough taxable income. If you don’t, it switches to bonus depreciation, which gives the same year-one deduction without the income limit.

What faster deductions are worth

Taking the deduction in year one instead of spreading it over five or seven years doesn’t change the total deduction. It changes the timing, and money saved sooner is worth more.

Take a $100,000 machine bought with $10,000 down and a 9% five-year loan, worth $25,000 after five years, with a 25% tax rate. Here is the after-tax cost of owning it, in today’s dollars:

Expensing in year one is worth about $2,498 over 5-year MACRS and $3,145 over 7-year MACRS here. The value grows with your tax rate:

At a 0% rate there’s nothing to bring forward, which is why expensing only helps if you actually owe tax.

How the phase-out works

The $2,560,000 limit shrinks by every dollar of qualifying purchases above $4,090,000. A business placing $4,200,000 of equipment in service in 2026 has a Section 179 limit of $2,560,000 − ($4,200,000 − $4,090,000) = $2,450,000. At $6,650,000 of purchases the limit reaches zero. Businesses buying at that scale typically rely on bonus depreciation, which has no phase-out.

Why some businesses still choose one over the other

Reasons to use Section 179:

• Asset-by-asset control. You choose exactly which assets and how much to expense, to land on a target taxable income.
• State tax. Some states follow Section 179 (sometimes at a lower limit) but not bonus depreciation, so Section 179 may produce a bigger state deduction.

Reasons to use bonus depreciation:

• No income limit. Useful in a low-income or loss year.
• No dollar cap or phase-out. Useful for large capital programs.
• Simplicity. It applies automatically unless you elect out for a class of property.

Reasons to use neither (regular MACRS):

• You expect higher tax rates later and would rather have deductions then.
• You want to smooth taxable income, for example ahead of a sale or a loan application where lenders look at earnings.

Leasing changes the picture

These deductions are for property you own. How the lease is structured matters:

• A $1-buyout lease is generally treated as a purchase for tax purposes, so you can use Section 179 or bonus depreciation, and deduct the interest part of the payments.
• A fair market value lease is generally a rental. You deduct the payments over the lease term, and the lessor claims the depreciation.

Because expensing brings a large deduction forward, it often tips the lease-vs-buy decision toward owning, unless you can’t use the deduction or the equipment will be obsolete soon. See FMV vs. $1-buyout leases for a worked comparison.

Check before you buy

• The equipment must be placed in service, meaning ready and available for use, by the end of the tax year, not just ordered or paid for.
• It must be used more than 50% for business to qualify for Section 179.
• Keep records of the purchase date, placed-in-service date and business-use percentage.
• Ask how your state treats both deductions.

Try it

The lease vs. buy calculator lets you switch between Section 179, bonus depreciation and 5- or 7-year MACRS. It shows the after-tax cost of buying against leasing in today’s dollars and warns if the purchase would exceed the Section 179 limit.