If your business bought or is about to buy equipment, two federal provisions can wipe out most of the tax cost in year one. Government tax incentives for capital equipment purchases center on Section 179 expensing, which lets you deduct up to $2,560,000 of qualifying property placed in service in 2026, and bonus depreciation under Section 168(k), which the One Big Beautiful Bill Act restored to 100% for most property acquired after January 19, 2025. Used together, they can turn a six- or seven-figure equipment outlay into an immediate write-off instead of a deduction stretched over five or seven years.
What Counts as Qualifying Equipment
Capital equipment for these purposes means tangible personal property your business uses for more than one year to produce income: manufacturing machinery, office furniture, medical instruments, computers, specialized tools. Off-the-shelf computer software available to the general public also qualifies. Certain improvements to nonresidential buildings are eligible for Section 179, including interior renovations, roofing, HVAC, fire protection, and security systems.
Two rules gate everything else. First, the equipment must be used more than 50% for business. Drop below that threshold during the asset’s recovery period and you lose the accelerated deduction, revert to straight-line depreciation, and potentially owe recapture tax on the difference. Property used primarily for entertainment or recreation is treated as “listed property,” which carries stricter documentation requirements and the same 50% floor.1Internal Revenue Service. Publication 587 – Business Use of Your Home – Section: Listed Property
Second, the asset must be “placed in service” during the tax year you claim the deduction, meaning ready and available for its intended use.2Internal Revenue Service. Publication 946 – How To Depreciate Property – Section: When Does Depreciation Begin and End A machine bought in December but sitting crated in a warehouse until February belongs to the later tax year. The placed-in-service date controls, not the purchase date.
Section 179 Expensing
Section 179 lets you deduct the full purchase price of qualifying equipment in the year it goes into service. For tax years beginning in 2026, the maximum deduction is $2,560,000, and the figure adjusts annually for inflation.3Internal Revenue Service. Rev. Proc. 2025-32
A dollar-for-dollar phase-out begins once your total Section 179-eligible purchases for the year exceed $4,090,000. Spend $6,650,000 or more and the deduction disappears entirely.3Internal Revenue Service. Rev. Proc. 2025-32 The design targets the benefit at small and mid-sized businesses.
Section 179 also cannot create or increase a loss. Your deduction is capped at the taxable income your business earns from active operations that year. If equipment cost exceeds profit, the unused portion carries forward and can be deducted when income allows.4Office of the Law Revision Counsel. 26 US Code 179 – Election to Expense Certain Depreciable Business Assets
One detail catches people: the Section 179 election is revocable only by filing an amended return within the time the IRS allows. Once that window closes, you’re locked in, and once revoked, the revocation itself is irrevocable.5Internal Revenue Service. Instructions for Form 4562 Decide how much to expense with that in mind.
100% Bonus Depreciation Is Back
Bonus depreciation had been phasing down under the Tax Cuts and Jobs Act schedule and was on track to zero by 2027. The One Big Beautiful Bill Act, signed July 4, 2025, reversed that. For most qualifying business property acquired after January 19, 2025, the bonus depreciation rate is 100%.6Internal Revenue Service. One, Big, Beautiful Bill Provisions
Watch the acquisition date. Property acquired after September 27, 2017, but before January 20, 2025, and placed in service during 2026 still falls under the old phase-down. For that category, the bonus rate is only 20%.7Internal Revenue Service. Rev. Proc. 2026-15 If you bought equipment in late 2024 or early January 2025 but didn’t install it until this year, you get the lower rate, not the restored 100%.
Bonus depreciation has no annual dollar cap and no income limit, so it can generate a net operating loss you carry forward. That makes it the stronger tool for purchases that swamp current-year profit. It applies to both new and used equipment, provided you haven’t used the property yourself before and it doesn’t come from a related party.8Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
Vehicle Caps Change the Math
Vehicles get special treatment that overrides the general rules. Passenger automobiles face annual depreciation caps regardless of what Section 179 or bonus depreciation would otherwise allow. For a passenger vehicle placed in service in 2026 that qualifies for bonus depreciation, the first-year deduction is capped at $20,300. The ceiling drops to $19,800 in year two, $11,900 in year three, and $7,160 for each year after until the vehicle is fully depreciated.7Internal Revenue Service. Rev. Proc. 2026-15
Without bonus depreciation, the first-year cap falls to $12,300 and the later-year figures stay the same.7Internal Revenue Service. Rev. Proc. 2026-15 The limits apply per vehicle.
Heavy SUVs and trucks rated above 6,000 pounds gross vehicle weight escape the passenger caps but hit a separate Section 179 ceiling. For 2026, the maximum Section 179 deduction on a qualifying SUV is $32,000.3Internal Revenue Service. Rev. Proc. 2025-32 Cost above that amount can still be recovered through bonus depreciation and regular MACRS. Vehicles over 14,000 pounds, including most full-size work trucks, aren’t subject to the SUV cap at all and can be fully expensed under the standard rules.
Recapture: The Bill That Comes Later
Accelerated deductions aren’t a free ride. When you sell equipment that received Section 179 or bonus depreciation, Section 1245 recaptures the tax benefit. Gain on the sale is treated as ordinary income up to the total amount of depreciation you claimed, including any Section 179 deduction. Write off $200,000 of equipment in year one, sell it three years later for $80,000, and that $80,000 is ordinary income, not capital gain. The statute treats Section 179 the same as depreciation for recapture.9Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
Recapture also triggers without a sale. If business use of the asset drops to 50% or below during its recovery period, you must report the difference between what you actually deducted and what straight-line depreciation would have allowed as ordinary income in the year use drops.1Internal Revenue Service. Publication 587 – Business Use of Your Home – Section: Listed Property Dispositions of depreciated business property are reported on Form 4797, with recapture calculated in Part III.10Internal Revenue Service. Instructions for Form 4797
State Taxes Often Don’t Follow Along
Federal deductions do not automatically flow through to your state return. A significant number of states either disallow bonus depreciation entirely or cap it at a lower percentage than the federal rate, and some impose Section 179 limits well below the federal ceiling. If your state doesn’t conform, you’ll need a separate depreciation schedule for state purposes that tracks the difference between federal and state deductions. You can end up owing state tax in a year your federal return shows a loss from equipment expensing. This mismatch is one of the most common sources of unexpected tax bills for businesses that invest heavily in equipment, and it’s worth confirming your state’s conformity rules before you make a large purchase.
Recordkeeping and Filing
The IRS expects records showing the purchase price, the acquisition date, the placed-in-service date, and how the asset is used in your business.11Internal Revenue Service. What Kind of Records Should I Keep – Section: Assets For any asset with mixed use, keep a contemporaneous log of business versus personal use. That log is what proves you cleared the 50% business-use threshold. Retain records for as long as you own the asset plus the statute of limitations for the year you dispose of it, because recapture calculations reach back to original cost.
Report both Section 179 and bonus depreciation on Form 4562, Depreciation and Amortization. The form asks for a description of each asset, its cost, the date placed in service, and the amount claimed under each provision. Form 4562 attaches to your business return: Schedule C on Form 1040 for sole proprietors, Form 1120 for corporations, or Form 1065 for partnerships.12Internal Revenue Service. Instructions for Form 4562 Equipment deductions draw audit attention, so keep the form, supporting schedules, and purchase documentation together from the year you claim the deduction through the year after you sell the asset.