If your business bought a piece of equipment this year, or you’re planning to before December 31, the question of how to deduct it deserves more than a quick conversation.
Section 179 and bonus depreciation both get you to the same place on the surface, but they work differently; they carry different limits, and new federal tax law changed the picture for 2026.
Bonus depreciation is back at full strength for qualifying property, per the One Big Beautiful Bill Act of 2025. Whether you use Section 179 vs bonus depreciation for small business equipment or use a combination of both depends on your income, your entity type, and what you’re buying. We’d much rather help you make that choice before the equipment arrives than explain it after.
Bonus Depreciation is Back at Full Strength for 2026 Thanks to New Federal Tax Law
Before the new law, bonus depreciation was on a schedule that shrank it a little more every year until it disappeared, and businesses that relied on it for equipment planning had been watching the benefit get smaller for a while.
The One Big Beautiful Bill Act of 2025 reversed that. It was signed in July 2025, and per IRS Publication 946 it reinstated the 100% deduction for qualifying property acquired and placed in service after January 19, 2025. It also removed the phase-down schedule, so the 100% rate doesn’t expire the way the old one did. One detail worth knowing is that the acquisition date follows the contract, so equipment you signed a binding purchase contract for before January 20, 2025 is treated as acquired back then.
So if you buy a qualifying asset and place it in service in 2026, you can deduct the entire purchase price in year one rather than spreading it over a multi-year depreciation schedule. For an owner who watched that benefit shrink, it’s a welcome change, and the first thing to understand is how Section 179 differs.
What is Section 179 and How Does it Work for Equipment Purchases?
Section 179 of the Internal Revenue Code lets you deduct the full cost of qualifying equipment in the year you place it in service, rather than recovering that cost over several years through standard depreciation. The IRS covers the mechanics in Publication 946.
The deduction applies to most tangible personal property used for business, like machinery, vehicles (with some limits), computers, and office furniture. Certain improvements to the inside of a commercial building can qualify too, but only if you elect to treat them as Section 179 property. You claim Section 179 on IRS Form 4562 by listing the specific property and the deduction amount.
One distinction matters for planning. Section 179 is an election, so you choose which assets to apply it to and in what amounts, up to the annual cap. Bonus depreciation applies automatically to qualifying property unless you elect out.
That flexibility is one reason the two methods often work together, and the limits are what decide whether you use one or both.
Section 179 has an Annual Deduction cCp and an Income Limit That Bonus Depreciation Does Not
The gap between the two shows up when the equipment bill is big relative to your profit, because Section 179 has two constraints bonus depreciation doesn’t share.
First, Section 179 has an annual dollar cap. For tax years beginning in 2026, the maximum deduction is $2,560,000, and it starts shrinking once the total cost of Section 179 property you place in service during the year goes over $4,090,000, according to IRS Publication 946. Most small businesses never get close to those numbers.
Second, and more important for most small businesses, Section 179 can’t exceed the taxable income from your business for the year, so it can’t push you into a loss. Any Section 179 amount you can’t use because of that income limit carries forward to the next year. Bonus depreciation doesn’t have an income limit, so it can create a loss or make an existing one bigger.
For a business in a strong year with a big equipment purchase, which method fits comes down to what else is going on in your business.
Which Method Makes More Sense for Your Metro East Small Business?
There isn’t one answer for everybody, but there is a practical way to think about it. If you want the biggest possible deduction this year, bonus depreciation can take the full cost even when that pushes the business into a loss. If you want the deduction to stop at a certain point, Section 179 lets you pick the amount, and if you elect out of bonus depreciation for that class of property, whatever you don’t expense gets depreciated over the normal schedule.
If you’re an S-corporation, keep in mind that a loss doesn’t stay inside the company. Losses pass through to the shareholders and show up on your personal returns. Meanwhile the business’s own return still shows the loss, and if you have a bank line of credit that requires positive net income, that’s the number the bank is looking at. Section 179 also passes through to S-corp shareholders, and the limits apply again on your personal return.
That pass-through connects to another deduction on your personal return. A bigger equipment write-off lowers the business income that flows through to you. That same income is the starting point for the Section 199A QBI deduction. It’s worth looking at the two together before you pick a depreciation method.
Let’s look at an example. We’ve seen this with Metro East contractors who had their best revenue year and bought two work trucks in December. The bank needed to see positive income, so they elected out of bonus depreciation, used Section 179 only up to the point that kept the year profitable and depreciated the rest of the truck cost on the regular schedule.
They gave up part of the first-year deduction, but the rest still gets deducted over the next few years, and the loan stayed in good standing. That only worked because we ran the numbers before the trucks were bought, back when there was still a choice to make.
The ‘Placed in Service’ Rule Decides Which Tax Year the Deduction Belongs Too
Both Section 179 and bonus depreciation follow the same timing rule. The deduction belongs to the tax year the property is placed in service, which isn’t necessarily the year you ordered it, got the invoice, or paid for it. The IRS says property is placed in service when it’s ready and available for a specific use, per IRS Publication 946.
This trips up Metro East business owners more than any other equipment rule. A machine ordered in November, paid for in December, but delivered and installed in February is a next-year deduction. The deposit and the invoice date don’t change anything, because what matters is the day the equipment is set up and ready to work.
If your goal is a 2026 deduction, the equipment needs to be on site and ready before the calendar rolls to 2027. That’s why the next few weeks matter, both for the purchase decision and for lining up delivery. A supplier who promises December delivery but runs late into January moves your deduction by a full year.
If the timing works, the next decision is how to split the deduction between the two methods.
Combining Section 179 and Bonus Depreciation Can Maximize Your Equipment Deduction
You can use both Section 179 and bonus depreciation in the same tax year. The order matters, though. Section 179 comes off first, and bonus depreciation then applies to whatever basis is left, per IRS Publication 946.
There’s an important wrinkle for Illinois businesses. Illinois doesn’t follow federal bonus depreciation. For 2026, Illinois law requires you to add back the full federal bonus deduction on your state return, and then you get it back starting that same year and continuing over the following years, roughly in line with what regular depreciation would have been. Section 179 isn’t part of that add-back, since the Illinois form for this reverses only the bonus depreciation. So the federal deduction and the Illinois deduction for the same equipment can come out very differently.
That gap is exactly why year-round business tax planning in Illinois pays off. We run the federal and Illinois numbers side by side, so you see the state impact before you decide how to deduct the equipment.
What Types of Equipment Qualify for Section 179 and Bonus Depreciation in 2026?
Most tangible personal property used in a trade or business qualifies for both methods, including machinery, computers, off-the-shelf software, and things owners tend to overlook, like furniture and fixtures.
Used equipment can qualify too. The IRS says qualified property for bonus depreciation can be new or certain used property, and there are conditions on how you got the used equipment, so it’s worth checking before you count on the deduction. Qualified improvements to the interior of a commercial building can be expensed under Section 179 if you make the election.
Some things don’t qualify. Land isn’t depreciable at all, and neither is inventory. Property used mostly outside the United States is excluded from Section 179. Mixed-use property gets its own rules. For Section 179, you need more than 50% business use in the year you place it in service, and for vehicles and other listed property, falling to 50% or below rules out both Section 179 and bonus depreciation. Passenger vehicles also have annual deduction limits that cap the combined amount.
Planning Equipment Purchases this Fall Still Leaves Time to Get It Right
Fall is still a good time to plan equipment, because you know what your income looks like for the year and there’s still time to model the choice before the order goes in. It also helps to have clean books, because the income limit and the bank’s view both depend on knowing where profit really stands, and that’s where our small business accounting work comes in.
The harder version of this conversation happens in January, when an owner asks about equipment bought in December and nobody talked strategy beforehand. Sometimes the delivery slipped, and sometimes nobody ran the Illinois numbers.
If you’ve got equipment on the list before year-end and want to know which method fits, reach out and we’ll walk through the numbers with you before the invoice arrives.
Contact Thompson Flaherty to set up a time. The first call is free and there’s zero pressure.
