Equipment Financing Guide
Bonus Depreciation vs. Section 179 for Financed Equipment
Bonus depreciation is back at 100% and no longer scheduled to phase out: the 2025 tax law made it permanent for qualified property acquired and placed in service after January 19, 2025. The Section 179 deduction limit for tax years beginning in 2026 is $2,560,000, phasing out once more than $4,090,000 of qualifying property is placed in service in the year. Both let a business deduct the full cost of equipment in the year it goes to work, financed or not. They differ in their limits, in what they cover, and in how much choice they leave you. This guide sets the two side by side, and keeps the old phase-down schedule on record, because it still governs property acquired before the change.
Definitions
What Each Deduction Is
Section 179
Section 179 of the Internal Revenue Code lets a business elect to deduct the cost of qualifying property in the year it is placed in service instead of depreciating it over several years. You choose which assets to elect and how much of each, up to an annual dollar limit, and the deduction cannot exceed the business’s taxable income for the year. Anything disallowed by the income limit carries forward.
Bonus depreciation
Bonus depreciation, called the special depreciation allowance in IRS publications, is an additional first-year deduction on qualified property. It is not capped by a dollar limit or by taxable income, so it can create or deepen a net operating loss. It applies automatically to every asset in a property class unless you elect out for that class, and it is taken after any Section 179 deduction, on the basis that remains.
How they combine
The order is fixed: Section 179 first, then bonus depreciation on the remaining basis, then regular depreciation on whatever is left. A business that stays under the Section 179 limit can usually deduct the whole cost either way. Bonus depreciation is what takes over when purchases exceed the Section 179 limit, when the business has a loss year, or when the asset is one Section 179 does not reach.
Side by Side
The Differences That Decide Which One You Use
| Point of difference | Section 179 | Bonus depreciation |
|---|---|---|
| Dollar limit | $2,560,000 for tax years beginning in 2026, reduced dollar for dollar once more than $4,090,000 of qualifying property is placed in service in the year | None |
| Percentage | Up to 100% of the cost, at your election | 100% of the cost for qualified property acquired and placed in service after January 19, 2025, permanently |
| Taxable income | Limited to the business’s taxable income; the excess carries forward | No income limit; can produce a loss |
| Choice | Asset by asset, and any amount up to the cost | All assets in a class, unless you elect out of the class for the year |
| Property covered | Tangible personal property, off-the-shelf software, and, by election, qualified improvement property plus roofs, HVAC, fire protection and alarm, and security systems on nonresidential buildings | Tangible property depreciated under MACRS with a recovery period of 20 years or less, which includes qualified improvement property (interior improvements to a nonresidential building, 15-year property), plus certain software. A roof does not qualify; HVAC, fire protection and security work qualifies only to the extent it is qualified improvement property |
| Used equipment | Qualifies | Qualifies if it is new to you and bought from an unrelated party |
| Heavy SUVs | Capped at $32,000 of Section 179 deduction for an SUV over 6,000 pounds that meets the statutory definition (2026) | Not subject to that cap, though passenger automobile limits can apply to lighter vehicles |
The 2026 Section 179 figures are from Rev. Proc. 2025-32; the bonus depreciation rule is from Public Law 119-21 as explained in IRS Notice 2026-11. Figures change each year; the Section 179 calculator carries the current ones.
Financed Equipment
What Financing Does and Does Not Change
Nothing about either deduction depends on paying cash. When you own the equipment for tax purposes, which you do under an equipment finance agreement or a $1 buyout lease, the deduction turns on the equipment being placed in service during the tax year and used in the business. The full cost can be deducted in a year when only a few monthly payments have gone out. That is the whole point of Section 179 qualified financing: the tax saving in year one can be larger than the payments made in year one.
Two things financing does change. First, timing: the deduction belongs to the tax year in which the equipment is placed in service, which the IRS defines as ready and available for a specific use, so an order that ships in January belongs to next year no matter when it was signed. Second, structure: on a true lease, such as a fair market value lease, the lessor owns the equipment and takes the depreciation, and you deduct the payments as rent instead. The lease accounting and tax treatment guide explains how the IRS draws that line.
For a financed purchase the practical sequence is: confirm the equipment qualifies, make sure it will be placed in service inside the year, elect Section 179 on the assets you choose, and let bonus depreciation cover the rest. The Section 179 qualified financing flyer puts the arithmetic on one page.
For the Record
What Changed Since 2023: The Phase-Down Schedule
This page was first published in January 2023, when bonus depreciation had begun a scheduled phase-down under the 2017 tax law. The schedule ran for two full years before the 2025 law replaced it for property acquired after January 19, 2025. For anyone amending a return, reading an older plan, or taking delivery of equipment bought under an earlier contract, here is what applied and what still applies.
2023 to 2026, under the schedule enacted before the change
- 2023: bonus depreciation of 80% for qualified property placed in service during 2023. The Section 179 deduction limit was $1,160,000, phasing out above $2,890,000 of property placed in service (Rev. Proc. 2022-38).
- 2024: bonus depreciation of 60% for qualified property placed in service during 2024.
- 2025, before the change: 40% for qualified property acquired before January 20, 2025 and placed in service during 2025. Property acquired and placed in service after January 19, 2025 qualifies for 100% under the new law; a business could instead elect 40% (60% for certain long-production-period property and aircraft) for property placed in service in its first tax year ending after January 19, 2025.
- 2026 and after: 100% for qualified property acquired and placed in service after January 19, 2025, with no scheduled phase-out. The old schedule still governs property acquired before January 20, 2025: 20% if it is placed in service during 2026 (Rev. Proc. 2026-15, section 2.02), and nothing after that.
The dates matter more than the percentages: the 100% rate follows the acquisition date as well as the placed-in-service date, so a contract signed in 2024 for equipment delivered in 2025 can fall under the old 40% rate, and the same contract delivered in 2026 falls under 20%. Property acquired after January 19, 2025 gets 100% in whichever year it is placed in service.
Common Questions About Bonus Depreciation and Section 179
Yes, for qualified property acquired and placed in service after January 19, 2025: Public Law 119-21 made 100% bonus depreciation permanent for that property, with no scheduled phase-out. Property acquired before January 20, 2025 and placed in service in 2026 stays on the old schedule at 20%.
80% for qualified property placed in service in 2023 and 60% for 2024, under the phase-down schedule in the 2017 tax law. That schedule still governs property acquired before January 20, 2025 (40% if placed in service in 2025, 20% in 2026); the 2025 law replaced it with a permanent 100% for property acquired and placed in service after January 19, 2025.
Yes. Section 179 is applied first, up to its limits, and bonus depreciation then applies to the basis that remains. Regular depreciation covers anything left after both.
Yes, when you own the equipment for tax purposes, as you do under an equipment finance agreement or a $1 buyout lease. The deduction depends on the equipment being placed in service during the tax year, not on how much of the price has been paid.
When you want to pick and choose: deduct some assets in full, leave others to depreciate over time, or deduct part of an asset. Section 179 also reaches, by election, roofs, HVAC, fire protection and alarm, and security systems on nonresidential buildings as qualified real property; bonus depreciation reaches that kind of work only where it is qualified improvement property, an improvement to the building’s interior. Bonus depreciation wins when purchases exceed the Section 179 limit or the business has a loss for the year.
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