Section 179 and Bonus Depreciation in 2026: A Small Business Owner's Guide

June 9, 2026 · Guide · 6 min read

Section 179 and bonus depreciation are the two most powerful deductions available to small business owners who buy equipment, vehicles, or business property — and in 2026, their rules have shifted significantly enough that what worked in your 2023 tax plan may not be optimal today. Bonus depreciation has dropped to 20% and phases out entirely in 2027 unless Congress acts. Here's what changed, what qualifies, and how your CPA should be using both.

What Section 179 Does

Normally, when a business buys equipment, it deducts the cost over several years through depreciation — a $50,000 piece of equipment deducted over 5-7 years at $7,000-$10,000 per year. Section 179 allows businesses to elect to deduct the full purchase price in the year of acquisition instead of spreading it out.

The 2026 limits:

• Maximum deduction: $1,250,000
• Phase-out threshold: The deduction reduces dollar-for-dollar once total equipment purchases exceed $3,130,000
• Income limitation: Section 179 cannot exceed your taxable business income. If your business has $80,000 in taxable income, you can deduct up to $80,000 via Section 179 — not more.
• Carryforward: Any Section 179 you're entitled to but can't use due to the income limit carries forward to future tax years.

Section 179 is an election — you choose whether to take it and how much. This makes it a precision planning tool: your CPA can dial the exact deduction amount to reduce taxable income to a target level rather than eliminating it entirely. This matters because many small business deductions and credits have income thresholds. For the full landscape of what you may be missing, see our guide on commonly overlooked small business tax deductions.

What Bonus Depreciation Does (and How It Changed in 2026)

Bonus depreciation works differently: it's automatic (you must actively opt out), it applies to a broader asset class than Section 179, and it can create or increase a net operating loss (NOL). In 2022, bonus depreciation allowed 100% first-year deduction on qualifying property. The Tax Cuts and Jobs Act scheduled a step-down:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0% (complete phase-out unless Congress acts)

At 20%, bonus depreciation is significantly less powerful than it was — but still valuable on large equipment purchases when combined with Section 179. A $500,000 equipment purchase can receive the full $500,000 Section 179 deduction if within income limits, or a combination of Section 179 plus 20% bonus depreciation on any remaining eligible basis.

What Qualifies for Each

Section 179 Qualifying Property

• Business equipment: machinery, computers, office equipment, manufacturing equipment
• Business vehicles (with specific limitations by vehicle type — see below)
• Off-the-shelf software placed in service during the tax year
• Qualified improvement property (QIP): interior improvements to nonresidential buildings

Bonus Depreciation Qualifying Property

Bonus depreciation covers everything Section 179 covers, plus used property acquired in an arm's-length transaction, qualified film and television productions, certain software development costs, and plants bearing fruit or nuts (relevant for agricultural businesses). Neither provision covers land, standard building structures (39-year real property), or intangible assets like goodwill or patents.

Which Comes First: Section 179 or Bonus Depreciation?

The standard approach for profitable small businesses: use Section 179 first to reduce taxable income to a target level, then apply bonus depreciation to any remaining eligible basis. This sequencing preserves income for purposes like QBI deduction optimization and allows for more precise income targeting.

For businesses with losses or complex tax situations, the calculus differs. Bonus depreciation can create an NOL that carries forward, potentially reducing taxes in a future high-income year. Section 179 cannot create a loss. Your CPA should be running a projection at least quarterly — not just at year-end — to optimize timing. See our guide on tax planning strategies for self-employed owners for the broader annual framework.

Vehicle Purchases: Where the Rules Get Complicated

• Standard passenger vehicles (under 6,000 lbs GVWR): Subject to luxury auto depreciation caps. In 2026, the first-year cap is approximately $12,400 for new vehicles with bonus depreciation applied — regardless of the actual purchase price.
• Heavy SUVs (6,001-14,000 lbs GVWR — Suburban, Expedition, Tesla Model X): Subject to a separate Section 179 cap of approximately $30,500 in 2026. Still significant, but not unlimited.
• Trucks and cargo vans over 6,000 lbs used for cargo: Not subject to luxury vehicle limits. Full Section 179 and bonus depreciation apply if used 100% for business.

Business-use percentage matters significantly: a vehicle used 70% for business can only deduct 70% of its depreciation. The IRS scrutinizes vehicle deductions closely — maintain a contemporaneous mileage log throughout the year.

Real Estate: Cost Segregation and Qualified Improvement Property

Real estate investors and business owners who own their building have additional opportunities that most miss:

• Cost segregation studies reclassify components of a building purchase or construction from 39-year real property to 5, 7, or 15-year personal property — making them eligible for Section 179 and bonus depreciation. A study on a $1.5 million commercial building might identify $300,000-$500,000 in components eligible for accelerated depreciation, generating significant first-year tax savings. The study itself typically costs $5,000-$15,000.
• Qualified Improvement Property (QIP) — interior improvements to nonresidential buildings after original construction — qualifies for bonus depreciation on a 15-year schedule. Restaurant fit-outs, office renovations, and retail buildouts often qualify. This is a significant opportunity that many business owners leave on the table each year.

Real estate-specific tax strategy is explored further in our guide on tax benefits of real estate investment.

Year-End Planning: When to Buy Equipment

Both Section 179 and bonus depreciation require the property to be "placed in service" — operational, not just ordered — by December 31 of the tax year. This creates a real planning implication:

• Equipment ordered in November but not delivered until January does not qualify for the current year.
• Equipment delivered and operational in December counts, even if not yet fully paid for.
• Financing a purchase does not affect the deduction — you can deduct the full cost in year one even on a 5-year equipment loan.

For comprehensive year-end planning that integrates depreciation strategy with income timing, entity structure, and retirement contributions, see our guide on year-end tax planning for small businesses.

State Conformity: The Often-Missed Wrinkle

Many states do not fully conform to federal Section 179 limits or bonus depreciation. California, for example, caps its own Section 179 deduction at $25,000 (vs. $1,250,000 federal) and does not allow bonus depreciation at all. This means your state taxable income can look very different from your federal taxable income after taking accelerated depreciation. A CPA filing in non-conforming states needs to maintain both a federal depreciation schedule and a state depreciation schedule simultaneously.

What Your CPA Should Be Doing

A CPA who isn't actively discussing Section 179 and bonus depreciation in mid-year planning conversations is leaving money on the table. Specifically, your CPA should:

• Run a year-end income projection by October to identify optimal equipment purchase timing
• Compare the tax value of an accelerated deduction against the time-value of spreading depreciation across multiple years
• Evaluate whether QBI (qualified business income) deduction thresholds are affected by income reduction via Section 179 elections
• Maintain parallel federal and state depreciation schedules in non-conforming states
• Advise on whether a cost segregation study makes sense given the current bonus depreciation rate of 20%

To find a CPA who takes an active planning posture rather than a reactive filing posture, browse CPAs by city or find CPAs near you with small business tax planning as a listed specialty.