Executive Tax Summary
Both Section 179 (26 U.S.C. § 179) and Bonus Depreciation (26 U.S.C. § 168(k)) allow commercial enterprises to accelerate depreciation deductions into the first year an asset is placed in service. However, they serve distinct strategic purposes: Section 179 allows granular dollar-for-dollar expensing with an active income ceiling ($1,250,000 cap), while Bonus Depreciation applies broadly across remaining basis without business income restrictions and can create Net Operating Losses (NOLs).
1. Statutory Comparison: Section 179 vs. Bonus Depreciation
| Statutory Feature | Section 179 (IRC § 179) | Bonus Depreciation (IRC § 168k) |
|---|---|---|
| 2026 Maximum Deduction | $1,250,000 | No Dollar Cap (100% of Remaining Basis) |
| Spending Phase-Out Limit | $3,130,000 Threshold (Dollar-for-dollar reduction) | No Spending Limit (Any Purchase Volume) |
| Taxable Income Limitation | Cannot exceed active trade/business income (No NOL) | No Income Limit (Can create or increase NOL) |
| Flexibility / Selection | Elected asset-by-asset, dollar-by-dollar | Elected by entire MACRS asset class |
| Eligible Property | New & Used qualifying tangible personal property | New & Used MACRS property with recovery ≤ 20 yrs |
| State Tax Conformity | High conformity (Some states cap at $25k, e.g. CA) | Frequently decoupled / disallowed at state level |
2. The IRS Ordering Rule: How to Stack Deductions
Under IRS Publication 946, when a business acquires qualifying commercial equipment, the tax write-offs must be applied in a strict sequential order on IRS Form 4562:
Elect up to $1,250,000 against qualifying assets on Form 4562 Part I Line 6. This directly reduces the remaining depreciable basis.
If total equipment acquisitions exceed $1,250,000, claim Bonus Depreciation under IRC § 168(k) on the remaining basis on Form 4562 Part II Line 14.
Any remaining basis after Section 179 and Bonus Depreciation is recovered over the asset's MACRS class life (3, 5, 7, or 15 years) via standard half-year or mid-quarter conventions.
📊 Worked Numerical Case Study: $1,600,000 Equipment Acquisition
Assume a precision machine shop purchases $1,600,000 in CNC machining centers in 2026:
• Asset Purchase Price: $1,600,000
• Section 179 Claimed (Step 1): $1,250,000 (Maximum Cap)
• Remaining Depreciable Basis: $350,000
• Bonus Depreciation Claimed (Step 2): $350,000 (100% of remaining basis)
• Total Year 1 Federal Tax Deduction: $1,600,000 (100% Write-Off)
• Cash Tax Savings (at 32% Marginal Rate): $512,000
3. State Tax Conformity & Decoupling Traps
A major pitfall for growing businesses is assuming state tax departments mirror federal rules. While the federal government allows $1.25M in Section 179, several key states enforce severe restrictions:
- California (CA Rev. & Tax Code § 17201): Caps Section 179 at $25,000 and completely disallows Bonus Depreciation. Requires state add-back adjustments on Form FTB 3805P / Form FTB 3885.
- Pennsylvania (72 P.S. § 7303): Enforces a $25,000 cap for personal income tax filers and disallows bonus depreciation on Corporate Net Income Tax (Form REV-183).
- New Jersey (N.J.S.A. § 54A:5-1): Caps Section 179 at $25,000 and disallows bonus depreciation for Corporation Business Tax (CBT-100 Schedule G).
- New York (N.Y. Tax Law § 612(k)): Conforms to the federal $1.25M Section 179 cap, but disallows federal bonus depreciation (Form IT-225 / CT-225).
To evaluate your exact state rules, check our interactive 50-State Tax Conformity Map.
Frequently Asked Questions
When should a business choose Section 179 over Bonus Depreciation?
Section 179 is preferred when you want surgical flexibility. Because Section 179 can be elected asset-by-asset, you can write off specific high-bracket equipment while preserving regular depreciation on other assets to spread deductions into higher-revenue future years.
What happens if Section 179 exceeds business taxable income?
Section 179 cannot reduce your active business income below zero. Any disallowed Section 179 deduction is carried forward indefinitely under IRC § 179(b)(3)(B) and claimed in future tax years.
Does used equipment qualify for both deductions?
Yes! Both Section 179 and Bonus Depreciation qualify for new and used equipment acquisitions, provided the used property is "new to the taxpayer" and was not acquired from a related party (IRC § 267).
Calculate Your Exact Year 1 Deduction Now
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