Buying equipment for your business used to come with a tax-planning puzzle: Section 179 or bonus depreciation? In 2026, under the One Big Beautiful Bill Act (OBBBA), that puzzle got both easier and more interesting. Section 179 expensing now tops out at $2,560,000, and 100% bonus depreciation is permanent for qualifying property acquired after January 19, 2025 — meaning most small and mid-size businesses can now write off the full cost of qualifying purchases in the year they’re placed in service, full stop. The real question isn’t “which one qualifies” anymore. It’s which one to actually use, and when the answer isn’t “both.”
Key Takeaways
- Section 179’s cap jumped to $2,560,000 for 2026, with a $4,090,000 phase-out threshold. OBBBA raised the statutory baseline to $2.5 million/$4 million, and the IRS’s 2026 inflation adjustment (Rev. Proc. 2025-32) pushed the actual numbers slightly higher.
- 100% bonus depreciation is now permanent, not a phase-down schedule. Property acquired after January 19, 2025 gets full first-year expensing under IRC Section 168(k) — reversing what would have been a drop to 40% in 2025 and 20% in 2026 under the old TCJA rules.
- Section 179 has an income cap; bonus depreciation doesn’t. You can only deduct as much Section 179 expense as your business has taxable income to absorb it, per IRC Section 179(b)(3) — bonus depreciation can create or deepen a net operating loss.
- Both apply to used property, with conditions. Section 179 requires the property be “new to you”; bonus depreciation requires it not be acquired from a related party or with carryover basis — neither requires the equipment be factory-new.
- State conformity is a real gap, not a footnote. California, for example, disallows federal bonus depreciation entirely and caps its own Section 179-style deduction at $25,000 — a business can face a large state/federal difference on the same purchase.
The rule: what Section 179 and bonus depreciation actually do
Both deductions let a business write off the cost of qualifying property faster than standard depreciation schedules would allow, but they work differently.
Section 179 is an election to expense the cost of qualifying property — new or used equipment, off-the-shelf software, and certain real property improvements — in the year it’s placed in service, up to a statutory dollar cap. For a deeper walkthrough of how the election itself works, see our Section 179 depreciation guide. Under IRC Section 179 as amended by OBBBA, the maximum deduction rose from $1,000,000 to $2,500,000, with the phase-out threshold (the point at which the deduction starts shrinking dollar-for-dollar) rising from $2,500,000 to $4,000,000, effective for property placed in service in tax years beginning after December 31, 2024. Both figures are now indexed for inflation. For 2026 specifically, the IRS set the actual limit at $2,560,000, with the phase-out beginning at $4,090,000 (the SUV sub-limit is $32,000).
Bonus depreciation is different — it’s not an election with a dollar cap, and it’s not limited to a per-business ceiling. Under IRC Section 168(k), OBBBA made 100% first-year bonus depreciation permanent for qualifying property acquired after January 19, 2025. This reversed the Tax Cuts and Jobs Act’s scheduled phase-down, which was headed toward 40% in 2025, 20% in 2026, and 0% by 2027. The IRS’s own bonus depreciation FAQ page confirms the restored 100% rate applies broadly to qualifying new and used tangible property with a recovery period of 20 years or less.
Why it matters: a worked example
Consider a landscaping company, Ridgeline Outdoor Services, that in 2026 buys $1,340,000 of qualifying equipment: three skid steers, a fleet of trucks, and a new irrigation-drilling rig. The business has $760,000 of net taxable income from its active operations before any Section 179 deduction.
If the owner elects Section 179 on the full $1,340,000, they run into the income limitation immediately: Section 179 deductions can’t exceed the taxpayer’s taxable income from the active conduct of the business, under IRC Section 179(b)(3). So only $760,000 is deductible this year; the remaining $580,000 carries forward to next year.
If instead the owner uses bonus depreciation on the same $1,340,000 purchase, there’s no income limitation — the full amount is deductible in 2026, even though it exceeds the business’s taxable income. That creates a $580,000 net operating loss for the business, which (subject to NOL rules) can offset other income or carry forward.
Neither answer is automatically “better” — it depends on whether the owner wants the deduction concentrated this year (useful if 2026 is a high-income year they want to offset) or would rather smooth it across years, and whether creating an NOL helps or just gets trapped by other limitations (like the excess business loss rules for pass-through owners). This is exactly the kind of trade-off worth modeling with an advisor before the purchase closes, not after the return is filed.
How it works in practice: eligibility, used property, and real estate
Used property qualifies for both — with different tests. Section 179 requires the property be “new to the taxpayer”: you can buy a used forklift and still expense it, as long as you didn’t previously own or use it. Bonus depreciation, since the 2017 TCJA, also covers used property, but with more specific conditions under the IRS’s own guidance: the property can’t have been used by the taxpayer or a predecessor before acquisition, can’t be acquired from a related party, and the taxpayer’s basis in it can’t be determined by reference to the seller’s basis (which rules out most related-party and carryover-basis transfers).
Ordering matters when you use both. In practice, many businesses claim Section 179 first on the assets where it’s most advantageous (like property nearing the phase-out threshold, or where the business wants to manage taxable income precisely), then apply bonus depreciation to what’s left. Because bonus depreciation has no income limitation, it “mops up” what Section 179 couldn’t reach without a carryforward.
Real estate and Qualified Improvement Property (QIP) get their own lane. QIP — interior, non-structural improvements to nonresidential real property, made after the building was first placed in service — was fixed by the CARES Act to carry a 15-year recovery period, which makes it eligible for bonus depreciation. Separately, under IRC Section 179(e) and (f), Section 179 itself can apply to qualified real property including roofs, HVAC units, fire protection and alarm systems, and security systems on nonresidential buildings. For a business doing a buildout or renovation, this means a chunk of what looks like “real estate” spending can actually get first-year expensing treatment — an easy thing to miss if a CPA isn’t specifically parsing the invoice by asset category. Real estate investors weighing these choices alongside other OBBBA provisions may also want to read our overview of what the One Big Beautiful Bill means for real estate investors and our broader guide to tax-efficient real estate strategies.
The catch — always the catch
Section 179’s income cap can bite harder than it looks. If your business has a rough year, or you’re a new business without much taxable income yet, Section 179 may simply not be available for the full purchase amount, no matter the dollar limit. The carryforward helps, but it delays the benefit.
Bonus depreciation’s lack of a cap can create problems elsewhere. A large bonus depreciation deduction that pushes a pass-through business into a loss can run into the excess business loss limitation for individual owners, capping how much business loss can offset non-business income in a given year. The deduction isn’t lost — it converts into a carryforward NOL — but it’s not always the instant tax bill reduction people expect.
State conformity is the quiet trap. Plenty of states don’t fully follow federal bonus depreciation or Section 179 rules. California is the standout example: it disallows federal bonus depreciation entirely (requiring an addback) and caps its own Section 179-style deduction at $25,000, phased out once qualifying purchases exceed $200,000 — a small fraction of the federal $2,560,000 figure. A business operating in a non-conforming state can end up with a large federal deduction and almost none of it recognized on the state return, creating a deferred state tax liability that catches owners off guard when the asset is eventually sold.
Recapture is real if you dispose of the asset or change its use. Both deductions are subject to recapture rules if business use of the property drops below 50%, or if the asset is sold before the end of its recovery period — the accelerated deduction can convert into ordinary income in a later year.
Strategy: what to actually do
- Model both scenarios before year-end, not after. Because Section 179 is elected on a per-asset (or per-asset-class) basis and bonus depreciation applies automatically unless you elect out, run the numbers on taxable income, multi-year projections, and state conformity before finalizing which assets get which treatment.
- Use Section 179 selectively to manage taxable income precisely, especially when you want to zero out income in a specific bracket rather than create a carryforward loss.
- Let bonus depreciation absorb what Section 179 can’t reach, particularly on large purchases in a business with lower current-year income.
- Have your invoices coded by asset class, especially on a renovation or buildout — QIP, roofs, HVAC, and alarm/security systems may qualify for different treatment than the rest of the project.
- Check your state’s conformity rules before assuming the federal deduction flows through. If you operate in California, New York, or another decoupled state, plan for a state-level addback and the deferred benefit that comes with it.
- Track disposal and use-percentage changes on expensed assets, since recapture can turn a prior deduction into taxable income later.
For a broader look at deductions available to smaller operations beyond depreciation, our small business tax deductions checklist and small business tax benefits guide are useful companion reads.
Where Harness fits in
Choosing between Section 179 and bonus depreciation — and layering in state conformity, income limitations, and NOL mechanics — is a multi-variable optimization problem, not a one-size answer. It’s exactly the kind of decision where a tax advisor who understands your specific income trajectory, entity structure, and state footprint earns their fee well before the purchase is even made. Harness connects business owners with tax advisors experienced in depreciation planning, multi-state conformity issues, and the broader OBBBA changes affecting 2026 filings. (For a related look at how these same two deductions have been discussed historically, see our earlier Section 179 vs. bonus depreciation comparison.)
Get started with Harness and make the most of the new tax landscape.
Putting it all together
Before your next equipment purchase or building improvement, check three things:
- Does your business have enough current-year taxable income to use Section 179 fully, or would bonus depreciation (with no income cap) better fit the purchase?
- Does your state conform to federal bonus depreciation and the higher Section 179 limits, or will you need to plan for a state-level addback?
- Have you broken out real estate and improvement costs by asset class, since some qualify for accelerated treatment (QIP, roofs, HVAC, fire/security systems) and some don’t?
Getting the sequencing and state overlay right is where the real savings — and the real risk of surprises — live.
Frequently Asked Questions
What is the Section 179 limit for 2026? For tax years beginning in 2026, the Section 179 deduction limit is $2,560,000, with the deduction phasing out dollar-for-dollar once qualifying purchases exceed $4,090,000, per IRS Revenue Procedure 2025-32. This reflects OBBBA’s statutory increase to a $2.5 million/$4 million baseline, adjusted for inflation.
Is bonus depreciation still phasing down to 0% by 2027? No. Under prior law, bonus depreciation was scheduled to drop to 40% in 2025, 20% in 2026, and 0% in 2027. OBBBA restored and made permanent a 100% bonus depreciation rate for qualifying property acquired after January 19, 2025, per IRC Section 168(k).
Can I use both Section 179 and bonus depreciation in the same year? Yes. Many businesses apply Section 179 to certain assets first (often to manage taxable income precisely) and then apply bonus depreciation to remaining qualifying property, since bonus depreciation has no dollar cap or income limitation.
Does Section 179 apply to used equipment? Yes, as long as the property is new to you — meaning you didn’t previously own or use it. It doesn’t need to be factory-new.
Does bonus depreciation apply to used equipment too? Yes, since the 2017 TCJA, bonus depreciation covers qualifying used property, provided it wasn’t previously used by the taxpayer or a related party and wasn’t acquired in a transaction with carryover basis.
Why would a business ever choose Section 179 over bonus depreciation if bonus depreciation has no cap? Because Section 179 lets you target specific assets and manage exactly how much income you offset, while bonus depreciation applies more broadly and can push a business into a loss. If you want precise control over your taxable income in a given year, Section 179’s flexibility can be preferable even with its income limitation.
Do all states follow the federal Section 179 and bonus depreciation rules? No. A number of states don’t fully conform. California is a commonly cited example — it disallows federal bonus depreciation and caps its own Section 179-equivalent deduction at $25,000, far below the federal figure. Always check your specific state’s conformity rules.
Does buying a building improvement qualify for these deductions? It depends on the type of improvement. Qualified Improvement Property (certain interior, non-structural improvements to nonresidential buildings) is eligible for bonus depreciation, and Section 179 separately covers roofs, HVAC systems, and fire protection, alarm, and security systems on nonresidential real property. Structural improvements and enlargements generally don’t qualify for either.
Disclaimer:
This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax professional for your specific tax situation.
Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.
Content was prepared by a third-party provider and not the adviser. Content should not be regarded as a complete analysis of the subjects discussed. Although we believe the content is reliable, it is not guaranteed as to accuracy and does not purport to be complete nor is it intended to be the primary basis for financial or tax decisions.
This blog contains links to other web sites as a convenience to the reader. These include links to web sites operated by one or more of the following: government agencies, nonprofit organizations and/or private businesses. When you use any of these links, you are no longer viewing our material, and our Privacy Notice will not apply. When you link to another web site, you are subject to the privacy policy of that new site. When you follow a link to one of these sites neither Harness, nor any agent, officer, or employee of Harness warrants the accuracy, reliability or timeliness of any information published by these external sites, nor endorses any content, viewpoints, products, or services linked from these systems, and cannot be held liable for any losses caused by reliance on the accuracy, reliability or timeliness of their information. Portions of such information may be incorrect or not current. Any person or entity that relies on any information obtained from those web sites does so at her or his own risk.