When a business buys equipment, machinery, vehicles, or technology, the tax code generally requires the cost to be “depreciated” — deducted gradually over the asset’s useful life rather than in the year of purchase. A computer, for example, is typically depreciated over five years under the standard MACRS depreciation schedule. A piece of commercial real estate is depreciated over 39 years. This matching principle makes accounting sense: the asset generates revenue over its life, so the cost should be matched to those revenue-generating years. But it is not always favorable from a cash flow and tax planning perspective. Two provisions in the US tax code — Section 179 and bonus depreciation — allow businesses to accelerate these deductions significantly, often deducting the full cost of qualifying assets in the year of purchase. Understanding and using these provisions correctly can dramatically reduce your current-year tax bill.
What Is Section 179?
Section 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying business assets placed in service during the tax year, up to a specified annual limit. For 2025, this limit is $1,220,000, with a phase-out beginning at $3,050,000 in total asset purchases.
The provision is designed to encourage small business capital investment by providing an immediate tax deduction rather than a multi-year depreciation schedule. Instead of deducting $2,000 per year for five years on a $10,000 computer, you deduct $10,000 in the year of purchase.
Qualifying assets under Section 179 include: tangible personal property used in a trade or business (machinery, equipment, computers, office furniture, and fixtures); off-the-shelf computer software; certain vehicles; and qualified improvement property (certain improvements to nonresidential real property).
Section 179 Limitations
Several important limitations apply to the Section 179 deduction.
Business income limitation: the Section 179 deduction cannot exceed the business’s taxable income from active business operations. If your business has a taxable loss, Section 179 cannot create or increase that loss. Disallowed Section 179 deductions are carried forward to future years.
Placed in service requirement: assets must be placed in service — meaning actually used for business — by December 31 of the tax year. Ordering or paying for equipment in December but not receiving or using it until January does not qualify for the current year.
More-than-50% business use requirement: assets must be used more than 50% for business purposes to qualify for Section 179. If a vehicle is used 60% for business and 40% personally, 60% of the cost qualifies. If business use drops below 50%, previously claimed Section 179 deductions may be recaptured.
Passenger vehicle limitations: luxury automobiles (broadly defined to include most passenger vehicles) are subject to special first-year depreciation caps that limit the Section 179 deduction significantly. Heavy SUVs (over 6,000 pounds GVWR) are subject to a $30,500 limitation for 2025.
What Is Bonus Depreciation?
Bonus depreciation (formally called “additional first-year depreciation”) is a separate provision that allows businesses to deduct a specified percentage of the cost of qualifying new (and, since 2017, used) assets in the year of purchase.
The bonus depreciation percentage has been changing in recent years. Under the Tax Cuts and Jobs Act, 100% bonus depreciation was available for assets placed in service between September 27, 2017 and December 31, 2022. Beginning in 2023, the percentage began phasing down: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, before being fully phased out (under current law) beginning in 2027.
For 2025, the bonus depreciation rate is 40%. On a $100,000 piece of equipment, 40% ($40,000) can be deducted as bonus depreciation in year one, with the remaining 60% depreciated under the standard MACRS schedule.
Section 179 vs Bonus Depreciation: Key Differences
While both provisions accelerate depreciation deductions, they differ in important ways.
Section 179 is elected asset by asset; bonus depreciation applies automatically to all qualifying assets in the same class unless the business elects out. This means bonus depreciation can create a business loss, while Section 179 generally cannot.
Section 179 is limited to business income; bonus depreciation can generate a loss that is carried back or forward to other tax years.
Section 179 is more flexible — you can choose which assets to expense and how much (up to the cost of each asset); bonus depreciation applies at the specified percentage to all qualifying assets in a class.
For businesses with sufficient income, Section 179 should generally be applied first to maximize the immediate deduction. Bonus depreciation then applies to any remaining cost basis.
Practical Tax Planning Applications
These provisions create meaningful tax planning opportunities for small businesses.
Year-end equipment timing: if you are considering purchasing equipment and have taxable income to shelter, buying before December 31 (and placing the asset in service before year-end) can create a deduction that reduces your current-year tax liability. The key is that the equipment must actually be in use — not merely ordered or delivered — by December 31.
Balancing the decision: buying $10,000 of equipment to generate a $2,500 tax deduction (at a 25% rate) still costs you $7,500 net. The tax deduction does not eliminate the expense. Only buy equipment you genuinely need for your business. Tax savings should be a factor in timing — not a reason to spend.
Alternative minimum tax consideration: Section 179 deductions are not affected by the alternative minimum tax (AMT) for most small businesses. Bonus depreciation creates an AMT adjustment, which may be relevant for businesses subject to AMT.
State conformity: many states do not conform to federal Section 179 or bonus depreciation limits. Check your state’s rules — in some states, you may need to depreciate assets over longer periods for state tax purposes even while claiming full expensing federally.
Conclusion
Section 179 and bonus depreciation are among the most valuable tax provisions available to small business owners who invest in equipment, technology, and other business assets. Used correctly, they can dramatically reduce the cost of capital investment by accelerating the tax deduction into the year of purchase rather than spreading it over many years.
The key is to use them intentionally and in coordination with your overall tax position. Work with a tax professional who understands both provisions, can model the impact on your specific tax situation, and can ensure the elections are made correctly on your tax return.