Section 179 vs. Bonus Depreciation

Every time you buy a machine, you make a tax decision whether you mean to or not. The two main tools for writing equipment off fast are Section 179 expensing and bonus depreciation. For 2026 both are bigger than they were two years ago, and the rules changed in the middle of 2025.

I want to walk through how each one works under current law, where they differ, and how I think about picking one, the other, or both. I'll also cover a third option for the building itself, because that's new.

This is general information, not tax advice. Work with your CPA on your own facts before you file.

What changed for 2025 and 2026?

The tax law signed on July 4, 2025 (P.L. 119-21, usually called the One Big Beautiful Bill Act or OBBBA) changed both tools. The old phase-down of bonus depreciation, which was supposed to take it to 20% in 2026 and zero after that, is gone for most new purchases.

• Bonus depreciation is back to 100%, and it's permanent, for property acquired after January 19, 2025.
• Section 179 went to a $2,500,000 limit for 2025. For 2026 the IRS indexed it to $2,560,000, with the phase-out starting at $4,090,000 of qualifying purchases.
• Qualified production property under new Section 168(n) lets manufacturers elect to write off part of a new factory building in year one. That has never been available before.

If you read an article from 2024 that says bonus depreciation is running out, it's out of date. That's part of why we rewrote this one.

What Is Section 179 Expensing?

Section 179 lets you elect to deduct the cost of qualifying equipment in the year you place it in service, instead of depreciating it over five or seven years. You choose which assets and how much of each.

For tax years beginning in 2026, the limit is $2,560,000. It starts shrinking dollar for dollar once the Section 179 property you place in service during the year passes $4,090,000. Buy $5,000,000 of equipment and the limit drops by $910,000 to $1,650,000.

There's one big constraint. Section 179 can't take you below zero. The deduction is limited to your taxable income from the active conduct of your business. Anything above that carries forward to future years. It doesn't create a loss.

It covers most machinery and equipment, off-the-shelf software, and some building improvements: qualified improvement property on the inside of a commercial building, plus roofs, HVAC, fire protection and alarm systems, and security systems. For a manufacturer that usually means CNC machines, presses, conveyors, inspection gear, forklifts, and the roof you've been patching for three years.

If you run an S corporation or partnership, the limit applies at the company level and again at each owner's level. Your CPA will check both.

What Is Bonus Depreciation?

Bonus depreciation (the tax code calls it the special depreciation allowance) is a first-year write-off of a percentage of an asset's cost. Whatever is left over gets depreciated on the normal schedule.

For property acquired after January 19, 2025, the percentage is 100%. There's no dollar cap. It applies to new equipment and to used equipment, as long as you haven't used that asset before.

Two other things matter. Bonus depreciation can create a loss, so it works even in a thin year. And it's the default. You don't elect into it, you elect out, and you elect out by whole class of property (all your 7-year property for the year, for example), not machine by machine.

The acquired-before trap

"Acquired" means the date you signed a binding written contract, not the delivery date. If you signed the purchase order before January 20, 2025, the old phase-down still applies to that asset. That's 40% if it was placed in service in 2025 and generally 20% if it's placed in service in 2026.

So a machine you ordered in late 2024 and finally got running in 2026 may not get 100%. Pull the signed PO before you assume it does.

Key Differences Between Section 179 and Bonus Depreciation

Question	Section 179	Bonus depreciation
2026 dollar limit	$2,560,000, phasing out above $4,090,000 of purchases	No limit
Can it create a loss?	No. Limited to business taxable income; excess carries forward	Yes. Can create a net operating loss
How you choose	Elect asset by asset, any amount	Automatic; elect out by class of property
Used equipment	Yes, if new to you	Yes, if you haven't used it before
Building improvements	Qualified improvement property, roofs, HVAC, fire and security systems	Qualified improvement property (15-year); not roofs or HVAC on their own
Percentage	Up to 100% of cost	100% if acquired after Jan 19, 2025; less under the transition rule

Both are timing tools. You get the same total deduction over the life of the machine either way. The question is whether you want it this year or spread out.

A worked example

Here's an illustrative case, not a client. A C corporation shop has $800,000 of taxable income in 2026 before its new equipment. It signs for a $900,000 five-axis machining center in March 2026 and has it running in June. The machine is 7-year property.

Approach	2026 deduction	2026 taxable income
Default 100% bonus	$900,000	($100,000) loss
Section 179 of $600,000, elect out of bonus for 7-year property, regular depreciation on the other $300,000	$642,870	$157,130
Elect out of bonus, regular depreciation only	$128,610	$671,390

The regular first-year rate for 7-year property under the half-year convention is 14.29%. So $300,000 times 14.29% is $42,870, and $900,000 times 14.29% is $128,610.

At the 21% corporate rate, writing off the full $900,000 is worth about $189,000 of tax, if the company can use all of it. But the machine still cost $900,000 in cash. Depreciation isn't cash. The deduction only changes when you pay the tax.

When Section 179 Makes More Sense for Manufacturers

I think Section 179 is the better tool when you have enough income to absorb it and you want control. You pick the asset and the amount, so you can land taxable income close to a target.

In the example above, if the owner wants to keep some taxable income in 2026, maybe to use credits or to avoid a loss that sits unused, Section 179 does that. Bonus depreciation is all or nothing for the whole class.

It's also the tool for roofs, HVAC, fire protection and security systems on an existing building. Bonus depreciation doesn't reach those on its own.

The trade-off is the income limit. If the year turns out weaker than you thought, part of the deduction waits for a future year.

When Bonus Depreciation Makes More Sense for Manufacturers

Bonus depreciation is the better fit when the investment is big relative to income, or when you're fine with a loss. If you're adding a second line in a year when margins are down, bonus still gives you the full write-off.

It's also simpler. It happens automatically, so there's no asset-by-asset election to manage. And it has no ceiling, so a $6 million expansion doesn't run into the Section 179 phase-out.

The trade-off is the loss. A C corporation's net operating loss generally carries forward and can only offset 80% of taxable income in a later year. For an S corporation, a loss passes through to the owners and is only useful if they have the basis to take it. A deduction that sits unused isn't worth much this year.

There's no time pressure anymore from a phase-down. Buy the machine when the business needs it, not because of the tax code.

What about the building? Qualified production property

A factory building is normally depreciated over 39 years. That's slow. New Section 168(n) adds a third option for manufacturers: elect to deduct up to 100% of the cost of qualified production property in the first year.

The rules are narrow. The building has to be nonresidential real property used as an integral part of manufacturing, production or refining. Construction has to begin after January 19, 2025 and before January 1, 2029. It has to be placed in service after July 4, 2025 and before January 1, 2031, and you have to be its original user.

Office space, administrative areas, R&D space, sales space and parking don't qualify. So you need to split the building. And if the production use changes within 10 years, the benefit can be recaptured.

The election is made on a timely filed original return, and the IRS has issued interim guidance with proposed regulations still pending. We wrote more about it in our post on the qualified production property incentive.

Not building new? A cost segregation study on an existing building can move parts of it into shorter lives, which then qualify for bonus depreciation. We cover that in our year-end tax planning guide for manufacturers.

Can You Use Both? The Combined Strategy

Yes. You can use both in the same year. The usual order is Section 179 first on the assets where you want control, then bonus depreciation on the rest.

The catch is that electing out of bonus is by class. If you want regular depreciation on part of your 7-year property, you're electing out for all of it. So the order of operations and the asset list need to be planned together.

A few more things I'd check before the return is filed:

• The signed contract date on every large purchase, for the acquired-before rule.
• Whether the equipment was actually placed in service by year-end. Delivered and crated isn't in service.
• What happens when you sell. Gain up to the depreciation you took is taxed as ordinary income (depreciation recapture). Expensing a machine you'll sell in two years can come back on you.
• Your loan covenants. Your books still depreciate the machine over its useful life. Lenders see book numbers, not tax numbers, so make sure the two are reconciled.

We also keep sound depreciation decisions across the asset base and the capital expenditure plan tied together, so the tax answer isn't a surprise.

What about state taxes?

Federal is only half the answer. Some states don't follow federal bonus depreciation or cap Section 179 lower. If you file in several states, your CPA will likely compute state depreciation separately.

Texas has no corporate income tax. It has the franchise tax, also called the margin tax. Starting with the 2026 franchise tax report, the Texas Comptroller says companies that use the cost of goods sold deduction can generally include federal bonus depreciation and Section 179 amounts in that deduction, to the extent they relate to producing goods. If you're in Dallas-Fort Worth and use a different margin method, the answer is different. Confirm with your CPA.

How Accounovation helps with depreciation decisions

We're not your tax preparer. We're the finance team that keeps the fixed asset records, the capital plan and the cash forecast current, and we work alongside your CPA so the return reflects what actually happened. Here's how we work with your CPA.

In practice that means we model the purchase before you sign, keep the signed contract and in-service dates on file, and hand your CPA a clean asset list at year-end. It's part of our manufacturing tax strategy and capital planning work.

If you have R&D on the shop floor too, read our guide to Section 174 R&D expensing. It's the other big deduction that changed. And before the tax math, check the operating math. If the new machine runs two shifts, it pays back fast. If it sits half the week, it doesn't. Look at capacity utilization first.

If you want help with an equipment decision this year, that's part of our fractional CFO work. Happy to jump on a call if helpful.

Frequently Asked Questions

Is bonus depreciation still phasing down in 2026?

No, not for property acquired after January 19, 2025. The 2025 law made 100% bonus depreciation permanent for those assets; only property under a binding contract signed before January 20, 2025 still follows the old phase-down.

What is the Section 179 limit for 2026?

$2,560,000, reduced dollar for dollar once qualifying purchases pass $4,090,000. The deduction also can't exceed your business taxable income, and any excess carries forward.

Does Section 179 or bonus depreciation apply to used equipment?

Yes, both do. The asset just has to be new to you, meaning you haven't used or owned it before.

What happens to Section 179 if my business has a loss this year?

It can't create or increase the loss. The unused amount carries forward to a year with enough business income, while bonus depreciation can create a net operating loss.

Should I wait until year-end to decide?

I wouldn't. The signed contract date, the in-service date and the class elections all matter, so the best time to plan is before you sign the purchase order.