Introduction

Choosing between Section 179 and Bonus Depreciation is one of the most powerful year‑end tax planning decisions a business owner can make. Both rules accelerate depreciation and reduce taxable income in the year an asset is placed in service, but they differ in eligibility, limits, and planning consequences. This guide uses concrete, easy‑to‑follow examples and practical tips I use in my CPA practice to show when each election makes sense.

How the two rules differ (quick comparison)

  • Section 179: An immediate expensing election that lets a business deduct the cost of qualifying tangible personal property and certain software in the year placed in service, up to an annual dollar limit and subject to a business‑income limitation. Limits are adjusted periodically; check the IRS page for the current dollar limits (IRS: Section 179 Expense Deduction).

  • Bonus Depreciation: A first‑year additional depreciation allowance that permits a business to deduct a fixed percentage of the asset’s cost in year one. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for property placed in service for several years and then phases down on a scheduled basis. Confirm the active percentage for the year you place property in service (IRS: Bonus Depreciation).

See FinHelp’s deeper primer on depreciation: Business Depreciation Basics: Section 179 and Bonus Depreciation.

Key planning constraints and interactions

  • Dollar caps vs. percentage: Section 179 is limited by an annual maximum deduction and is constrained by total qualifying purchases; bonus depreciation typically has no aggregate dollar cap and applies as a percentage of eligible property cost.

  • Business income limit (Section 179): Section 179 can’t create a net business loss for the year — your allowable Section 179 deduction is limited to the business’s taxable income from active trades or businesses. Unused Section 179 can often be carried forward. Bonus Depreciation is not limited by taxable income in the same way and can create or increase a net business loss in the year it’s taken.

  • Eligible property: Section 179 generally covers most tangible business equipment, off‑the‑shelf software, and certain improvements. Bonus depreciation covers most property with a recovery period of 20 years or less, and — depending on legislative rules — may apply to new and used property.

  • State conformity: Some states do not conform to federal bonus depreciation or Section 179 rules or adopt them with different limits. Always test state tax impact.

  • Recapture risk: If you stop using property predominantly for a business (less than 50%) in a later year, some of the excess deduction may be subject to recapture rules.

Three practical examples (with worked numbers)

Note: dollar limits for Section 179 and the active bonus depreciation percentage change by year and can be adjusted by Congress. The examples below use round numbers and percent rates for illustration. Confirm current year limits on the IRS pages before filing.

Example 1 — High income, large equipment purchase (use bonus depreciation)

Scenario: A construction company has $1,200,000 in taxable profit for the year and buys new equipment costing $1,000,000.

Choices and outcome:

  • Section 179 path: If the company elects Section 179 but the annual Section 179 limit is lower than $1,000,000 (or the company is close to the phase‑out threshold), it may not be able to expense the entire amount under Section 179. The allowed Section 179 deduction is also limited to the company’s taxable income from the business.
  • Bonus depreciation path: Electing bonus depreciation (assuming the applicable year’s bonus rate is large, e.g., 80% or 100% in prior years) lets the company write off a large portion — or all — of the $1,000,000 in year one even if Section 179 is constrained.

Conclusion: For a profitable business with a very large purchase that exceeds the Section 179 cap or where the owner wants to fully eliminate current taxable income, bonus depreciation is typically preferable.

Example 2 — Low profit / expectation of higher future profit (use Section 179 or blend)

Scenario: A startup with $20,000 in taxable profit buys $60,000 of laptops, servers, and business software.

Choices and outcome:

  • Pure bonus depreciation: If elected and the bonus depreciation percentage is high, the business could create or enlarge an annual net operating loss (NOL). An NOL may be useful, but current NOL rules and carryover limitations differ from year to year and can trigger AMT or other tax consequences.
  • Section 179 path: Because Section 179 is limited by taxable income, the startup can only expense up to its $20,000 of business income under Section 179 in year one; the remaining cost can be depreciated over time under MACRS.

Blended approach: First elect Section 179 up to the business income limit (maximizing the immediate deduction without creating an NOL), then use bonus depreciation on remaining eligible cost. This preserves some deductions now while keeping tax attributes cleaner for future years.

Practical tip from my practice: Startups often prefer to take Section 179 to avoid creating a loss that complicates tax filings and future payroll tax or ACA calculations.

Example 3 — Large purchase that exceeds Section 179 cap (use Section 179 plus bonus)

Scenario: A manufacturing business buys $4,000,000 of qualifying machinery in a year where Section 179 has a phase‑out start at $2,000,000 for illustration.

Choices and outcome:

  • Because Section 179 phases out when purchases exceed a threshold, the business may not be able to claim the full Section 179 amount. A common strategy: claim Section 179 up to the allowable cap or business income, then use bonus depreciation on the remainder of the cost to accelerate write‑offs.

Why this matters: A blended election often achieves the best of both worlds — immediate expensing to the extent allowed under Section 179, then bonus depreciation to accelerate any remaining basis.

Step‑by‑step decision checklist (what I run through with clients)

  1. Confirm eligibility: Is the property tangible personal property, off‑the‑shelf software, or qualified improvement property? (Check IRS lists.)
  2. Check current year Section 179 dollar limit and phase‑out threshold on the IRS Section 179 page.
  3. Check the active bonus depreciation percentage for the tax year.
  4. Estimate your business’s taxable income from the active trade or business — Section 179 is capped by this amount.
  5. Model both elections using realistic scenarios: immediate deduction vs. spread over future years. Run after‑tax cash flow and tax projection for the next 3–5 years.
  6. Consider state tax treatment and possible reconciling adjustments required on state returns.
  7. Document the election on the tax return — Section 179 is elected on Form 4562; bonus depreciation is typically claimed via depreciation schedules and the appropriate boxes on Form 4562. (See IRS Form 4562 instructions.)

Common pitfalls and how to avoid them

  • Relying on outdated dollar limits: Section 179 caps and bonus depreciation rules change; verify the current year’s limits on the IRS website before picking an election.
  • Ignoring state tax differences: Some states don’t allow federal bonus depreciation, creating an add‑back on the state return and potential state tax liability.
  • Overusing Section 179 when income is low: That can produce wasted deduction carryforwards or complicated loss positions.
  • Forgetting recapture: If business use drops below qualifying percentages in later years, be prepared for potential recapture adjustments.

Tax form and filing practicals

  • Section 179 elections (and detail of property) are reported on Form 4562. Keep contemporaneous invoices and a fixed‑asset schedule.
  • Bonus depreciation is reflected through Form 4562 depreciation entries and MACRS calculations.
  • If you change your mind after filing, amending depreciation elections can be complex — consult a tax professional.

State conformity

Always check state tax rules. For example, some states do not conform to federal bonus depreciation; others limit Section 179 in different ways. In practice, I prepare a federal projection first, then a state reconciliation to show the book/tax differences and projected state tax due.

When to consult a CPA or tax advisor (my recommended triggers)

  • You’re buying > $1 million of qualified property in a year.
  • Your business expects large swings in taxable income over the next 2–3 years.
  • You operate in states with nonconforming tax rules or multi‑state operations.

Useful IRS and FinHelp resources

Internal links

Professional note and disclaimer

In my practice advising small businesses and startups, I frequently run simple three‑year tax projections with and without Section 179 and bonus depreciation to see which election produces the best after‑tax cash flow and lowest risk. This article is educational and not individualized tax advice; consult a licensed CPA or tax advisor to apply these rules to your specific facts and to confirm current year limits and rates.

Bottom line

There’s no single correct answer — the best choice depends on taxable income, expected future income, the size of the purchase, state tax rules, and long‑term business plans. Use Section 179 when you want controlled, income‑limited expensing that won’t create unwanted losses; use bonus depreciation when you need maximum first‑year write‑offs and have sufficient business income or want to generate a loss for carryover. Often a blended approach — Section 179 up to the income limit, then bonus depreciation on the remainder — gives the most flexible and tax‑efficient result.

References