Capital Investment Tax Deduction: Section 179 and Bonus Depreciation

A business can deduct the cost of equipment, vehicles, software, interior buildouts, and other long-lived assets through the capital investment tax deduction rules in the Internal Revenue Code, and in most cases the full purchase price can come off taxable income in the first year. Two provisions do the heavy lifting. Section 179 lets qualifying businesses expense up to $2,560,000 of property placed in service in 2026.¹ Bonus depreciation, made permanent at 100 percent under legislation signed in 2025, covers the rest with no dollar cap.² Which one you use, and how they interact, decides how much of a purchase you can write off this year and how much waits.

Section 179 Expensing

Section 179 lets a business deduct the full purchase price of qualifying property in the year it goes into service instead of spreading the cost over the asset’s depreciable life.³ The property must be tangible and used in the active conduct of a trade or business. Production machinery, office furniture, and off-the-shelf software available to the general public under a non-exclusive license all qualify.⁴

2026 Dollar Limits

For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000. A phase-out starts once total qualifying property placed in service during the year exceeds $4,090,000. From there the deduction shrinks dollar-for-dollar and reaches zero at $6,650,000 in purchases.¹ The thresholds adjust for inflation each year, so the current revenue procedure is worth checking every filing season.

The Taxable Income Cap

Section 179 cannot create or increase a net loss. The deduction is capped at the taxpayer’s total taxable income from all trades or businesses actively conducted during the year.⁵ A business earning $200,000 that places $300,000 of qualifying equipment in service can expense $200,000 this year. The remaining $100,000 carries forward with no expiration and comes off income whenever future taxable earnings allow it.

Bonus Depreciation

Bonus depreciation under Section 168(k) sits alongside Section 179 but works differently. Under the One Big Beautiful Bill signed in 2025, qualified property acquired after January 19, 2025, gets a permanent 100 percent first-year deduction.² The earlier phase-down that would have cut the rate to 20 percent in 2026 was eliminated.⁶

There is no dollar cap on bonus depreciation, which makes it the tool of choice when a purchase blows past the Section 179 limits. It applies to new and used property, though used property has to be new to the buying business and cannot come from a related party or through inheritance.⁷ Unlike Section 179, it can push a business into a net loss.

Choosing Between the Two

The IRS rules require Section 179 first, then bonus depreciation on any cost that remains. In practice, smaller businesses often lean on Section 179 alone because it caps out at taxable income and won’t accidentally produce a loss on the return. Businesses making very large capital outlays, or startups that expect to lose money in early years and want to build a net operating loss carryforward, tend to rely on bonus depreciation for the overflow or use it exclusively.

A few practical differences shape the choice:

Section 179 cannot create a loss. Bonus depreciation can, which is useful if you want the NOL for future years.
Section 179 tops out at $2,560,000 in 2026 and phases out entirely above $6,650,000 in purchases. Bonus depreciation has no ceiling.¹
Excess Section 179 carries forward indefinitely. Net operating losses from bonus depreciation carry forward too, but under separate NOL rules.
Section 179 covers tangible personal property and certain qualified real property. Bonus depreciation reaches a broader range of assets with recovery periods of 20 years or less.

What Qualifies and Who Qualifies

Business-Use Percentage

Both deductions require the asset to be used in a trade or business, not as a hobby or purely for personal purposes. “Listed property” like vehicles and equipment that commonly serves double duty has a higher bar: business use must exceed 50 percent of total use. Buy a $50,000 truck and use it 70 percent for business, and $35,000 is deductible. If business use later drops below 50 percent, you have to switch to a slower depreciation method and recapture the excess deductions already taken as ordinary income.⁸

Tracking business use means keeping a contemporaneous log of miles, hours, or another reasonable measure. Year-end estimates without supporting records rarely survive an audit.

Used Property

Section 179 and bonus depreciation both apply to used assets, but the property has to be new to your business. Equipment you already owned and are repurposing does not qualify. For bonus depreciation, the property also cannot come from a related party, and your cost basis cannot be derived from the seller’s basis, which rules out most gifts and certain like-kind exchanges.⁷

Special Rules for Business Vehicles

Vehicles are one of the most commonly deducted business assets and one of the most misunderstood. Passenger automobiles have annual depreciation caps regardless of what the vehicle actually cost.

For passenger vehicles placed in service during 2026:⁹

With bonus depreciation: $20,300 in year one, $19,800 in year two, $11,900 in year three, and $7,160 each year after.
Without bonus depreciation: $12,300 in year one, with the same limits after that.

A business buying a $60,000 sedan therefore deducts $20,300 in year one, not the full price. The rest depreciates slowly over the following years.

Heavier vehicles escape those caps. SUVs with a gross vehicle weight rating above 6,000 pounds qualify for a Section 179 deduction of up to $32,000.¹ Trucks and vans above that weight threshold that are not classified as passenger vehicles can qualify for the full Section 179 deduction up to the general $2,560,000 limit, plus bonus depreciation on any remaining cost. That is why heavy pickups and cargo vans keep showing up on the tax-planning wish list.

Interior Buildouts and Qualified Improvement Property

Businesses that lease or own commercial space often spend heavily on interior work. Qualified improvement property covers improvements to the interior of a nonresidential building made after the building was first placed in service. Eligible work includes installing or upgrading systems like plumbing, ventilation, fire alarms, and security.¹⁰

The exclusions catch people. Building expansions, elevators, escalators, and the internal structural framework do not count. Exterior improvements like roofing, windows, or facade work are ineligible, as are improvements to residential properties. If a building earns more than 80 percent of its income from residential tenants, it is treated as residential and its interior improvements do not qualify.

Qualified improvement property is classified as 15-year property and is eligible for both Section 179 and bonus depreciation. The full cost of a qualifying interior renovation can come off income in the year the work is placed in service.

What Happens When You Sell the Asset

Every dollar of depreciation reduces the asset’s tax basis, so a lower basis at sale produces a larger reported gain. Under Section 1245, any gain on the sale of depreciable personal property is taxed as ordinary income to the extent of prior depreciation deductions.¹¹ Section 179 deductions are treated the same way for recapture.

An example makes the math clear. Buy a machine for $100,000, deduct the full amount under Section 179, and sell it three years later for $40,000. Adjusted basis is zero because the cost was already written off, so the entire $40,000 is gain and all of it is ordinary income, not capital gain. That does not make the deduction a bad deal. Years of deferred tax and cash in hand in the meantime are real value. Planning for the recapture bill at sale just prevents the surprise. The sale and recapture go on Form 4797, Sales of Business Property, with the return for the year of disposal.

How to File

The primary form is IRS Form 4562, Depreciation and Amortization. Section 179 elections go in Part I with the property description, cost, and elected amount. Bonus depreciation is claimed in Part II as the special depreciation allowance. The form also requires you to classify each asset by its recovery period and depreciation method.¹² Form 4562 attaches to the main return for your entity type, and each separate business needs its own.¹³

Keep the purchase invoice, a record of the exact date the property was placed in service, and the business-use percentage if the asset has any personal use. “Placed in service” means the date the asset was ready and available for its intended use, even if you did not actually start using it that day.⁴ The IRS requires depreciation records to be retained until the statute of limitations expires for the tax year in which you dispose of the property.¹⁴ In practice, hold onto receipts and depreciation schedules for the entire time you own the asset plus at least three years after filing the return that reports its sale.

State Tax Conformity

Federal deductions do not automatically flow through to your state return. A number of states decouple from federal bonus depreciation, so a purchase that produces a 100 percent federal write-off can generate only a fraction of that on the state side. Some states impose their own Section 179 caps below the federal limit. Others require the bonus deduction to be added back and spread over several years on the state’s own schedule. Checking your state’s conformity before filing prevents a state tax bill that quietly offsets part of the federal savings.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
3
Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
4
Internal Revenue Service. Publication 946 – How To Depreciate Property
5
eCFR. 26 CFR 1.179-2 – Limitations on Amount Subject to Section 179
6
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
7
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
8
Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles
9
Internal Revenue Service. Rev. Proc. 2026-15
10
Internal Revenue Service. Topic No. 704, Depreciation
11
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
12
Internal Revenue Service. Form 4562 – Depreciation and Amortization
13
Internal Revenue Service. Instructions for Form 4562
14
Internal Revenue Service. Publication 583 – Starting a Business and Keeping Records