When a business buys equipment, the normal tax rule is to depreciate it: deduct the cost gradually over several years. Two provisions let you deduct much more, or all of it, in the first year:
- Section 179 expensing;
- bonus depreciation.
The 2025 tax law, the One Big Beautiful Bill Act, made both more generous. Here’s how they work, how they differ, and how to think about using them.
What changed in 2025
- Section 179: the annual limit rose to $2.5 million, and it begins to phase out once total equipment purchases exceed $4 million. These are the 2025 figures; they are indexed for inflation after that.
- Bonus depreciation: 100% bonus depreciation was restored permanently for qualifying property acquired after January 19, 2025. Before the new law, bonus depreciation had been phasing down; it was 40% for 2025 under the old rules.
Together, these mean most small and mid-sized businesses can deduct the full cost of qualifying equipment in the year it is placed in service.
How they differ
| Section 179 | Bonus depreciation | |
|---|---|---|
| Annual dollar limit | Yes ($2.5M for 2025, indexed) | No |
| Phase-out based on total purchases | Yes (begins at $4M for 2025) | No |
| Limited to business taxable income | Yes; the excess carries forward | No; it can create a loss |
| Elect asset by asset | Yes | By class of property; opt-out is by class |
| Used equipment | Yes, if new to you | Yes, if new to you |
| State tax treatment | Many states conform, some limit it | Many states don’t follow it |
The key practical differences:
- Section 179 can’t create a tax loss. Deductions above your business income carry forward to future years.
- Section 179 is flexible: you choose which assets and how much to expense.
- Bonus depreciation has no dollar cap and can produce a net operating loss. It is also applied automatically unless you elect out for a class of property.
Financing doesn’t block the deduction
You can generally claim Section 179 or bonus depreciation on equipment you finance, not just equipment you pay for in cash, as long as it is purchased and placed in service during the tax year. That can create a helpful mismatch: a large deduction in year one while the payments are spread over several years.
Example. A contractor finances a $120,000 machine with 10% down and 7% sales tax, on a 5-year loan at 8.5%:
- The monthly payment is about $2,398.
- If the full $128,400 cost basis (price plus sales tax) is expensed in year one at a 26% combined tax rate, the tax savings are roughly $33,400, more than a year of loan payments.
Estimate yours with the equipment loan calculator.
Leases are different
- A $1 buyout lease is usually treated as a purchase, so the depreciation deductions generally apply.
- A true (fair-market-value) lease usually isn’t. Instead, the lease payments are generally deducted as a business expense when paid.
Check how your agreement is classified with your tax advisor.
Things to watch
- Placed in service. Equipment must be ready and available for use in the tax year. Buying it on December 30 isn’t enough if it isn’t delivered and set up.
- Business-use percentage. Property must be used more than 50% for business to qualify for Section 179. The deduction is limited to the business-use portion.
- Vehicles. Passenger vehicles face annual depreciation caps, and heavy SUVs have a separate, lower Section 179 limit. Trucks and vans configured for business use can be treated differently. The rules are detailed, so check IRS Publication 946.
- Recapture. If business use later drops to 50% or less, or you sell the equipment, some of the deduction may be “recaptured” as income.
- Small items. The de minimis safe harbor lets many businesses expense lower-cost items (commonly up to $2,500 per item or invoice) without depreciating them at all.
- Future years. A big deduction now means no depreciation on that asset later. If you expect a much higher tax rate in future years, spreading the deduction out could be worth more.
Which should you use?
For many small businesses with enough income, the answer is either or both:
- Use Section 179 to target specific assets precisely, especially when you want the deduction without creating a loss, or when your state conforms to Section 179 but not bonus depreciation.
- Use bonus depreciation for purchases above the Section 179 limit, when you want to create or increase a net operating loss, or when your income limits Section 179.
- Consider regular depreciation when you expect higher income or tax rates in coming years.
Because these choices interact with your income, entity type and state rules, make the final decision with a CPA or enrolled agent.
Sources:
- IRS Publication 946, How To Depreciate Property
- IRS: One, Big, Beautiful Bill provisions
- IRS: tangible property regulations (de minimis safe harbor)