In this article, Staff Accountant Maggie Blenker answers your top questions about the Section 179 Depreciation Deduction: what it is, how it’s applied and key considerations that could affect your eligibility.
Q: What is the Section 179 Deduction?
A: Rather than depreciating equipment over time, businesses can elect Section 179 to immediately expense up to $2.5 million in qualifying property. This means businesses can keep more working capital and greatly reduce taxable income in years in which they make big investments.
Q: What Property Qualifies?
A: To qualify, property must be placed in service during the tax year in which the deduction is taken and be used primarily (>50%) for business. Any percentage that is personal use cannot be deducted under Section 179.
There are many types of property that qualify for the Section 179 deduction, including:
- New & used machinery, equipment, and furniture
- Business vehicles (must meet weight/class requirements)
- Certain software
- Eligible improvements to non-residential buildings
Note: Given the potential for personal use of vehicles, the IRS requires documentation proving that business use exceeds 50%.
Q: What if My Business Finances or Leases Its Vehicles?
A: Financed vehicles also qualify under Section 179. Whether leased vehicles qualify depends on the type of lease. Qualifying leases include capital (finance) leases and lease-to-own agreements, while operating leases do not qualify under Section 179.
Q: What If the Business Decides to Sell the Asset?
A: If the business sells an asset for which they’ve previously elected Section 179, the excess of the deduction over MACRS depreciation must be recaptured. This amount will be considered ordinary income to the extent of the gain on its sale or disposal. Recapture also applies if the asset drops below 50% business use. These events must be reported to the IRS using Form 4797.
Q: What is the Deduction Limit and Phase-Out Threshold?
A: The deduction limit for the 2025 tax year is $2.5 million, which is reduced dollar-for-dollar when purchases exceed $4 million, and is completely phased out after $6.5 million.
Note: This deduction is limited to the amount of taxable income the business has. To receive the maximum deduction, the business must have at least $2.5 million in taxable income.
Q: How Can My Business Elect Section 179?
A: To elect Section 179, the business must file Form 4562 with its return. For vehicles, additional details such as mileage, employee use, and business use percentage must be provided on Page 2 of the form. Businesses should be sure to maintain supporting records of these vehicles in case of an audit.
Q: What About Bonus Depreciation?
A: Many strategies involve the use of both Section 179 and bonus depreciation; an additional deduction which has no purchase limit and allows 100% of the cost of qualifying property to be deducted in the year it’s placed in service. Bonus depreciation has no phase-out, is not limited by taxable income, and applies automatically – meaning you don’t need to elect it.
Q: Which Is Right for My Business?
A: Each business is unique and therefore requires its own strategy. Businesses should discuss these deductions with a licensed CPA who can create a personalized strategy not only to maximize deductions, but to also highlight future planning opportunities for the business.
The above example shows possible combinations of Section 179 and bonus depreciation. Bonus depreciation can be used to create or increase a Net Operating Loss (NOL), as shown with Business Z.
Q: Does This Apply to State Taxes?
A: Every state is different – states may choose to conform fully, partially, or not at all. While most states do conform to Section 179, states often opt to use a lower deduction amount. For example, Connecticut requires businesses to add back 80% of any amount deducted for Section 179. For this disallowed portion, a deduction of 25% can be taken each year for four years.
Many states do not conform to the federal bonus depreciation rules, requiring businesses to add back any bonus depreciation deduction taken for federal taxes. However, states may allow a different deduction to be taken for state taxes. For example, Florida permits a deduction for one-seventh of the bonus depreciation added back to be taken each year for seven years.
Q: What Should Businesses Know for Next Year?
A: To maximize benefits of Section 179, businesses must plan before they purchase. Significant purchases should be discussed with a CPA who can create a strategy tailored to the specific needs of the business. The timing of a business’s asset purchases could be more beneficial if accelerated to this year (or if pushed to a later year) based on expected taxable income, phase-out limits, and other factors. For 2026, Section 179 limits and thresholds will be indexed for inflation, while bonus depreciation will remain at 100%.
Q: Where Can I Learn More?
A: To ensure your business maximizes every eligible tax break, reach out to us – our tax professionals will help you make the most of every opportunity in the tax code.
