Understanding Recent Changes to Depreciation Rules for Small Businesses

Overview

The last major federal change to depreciation rules came with the Tax Cuts and Jobs Act (TCJA) of 2017, which expanded immediate-expensing options for businesses and simplified some depreciation mechanics. For many small businesses that buy equipment, vehicles, or software, two tools matter most: the Section 179 deduction and bonus depreciation. Both can let you write off a larger portion — or all — of an asset’s cost in the year it’s placed in service instead of spreading deductions over its useful life.

Below I explain what changed, who it affects, how to choose between methods, and practical recordkeeping and planning tips. In my 15 years advising small businesses, using these rules proactively can dramatically improve cash flow in capital-intensive years, but they also create tax-timing tradeoffs and potential state-level differences.

(Authoritative guidance: IRS Publication 946: How To Depreciate Property (IRS Pub. 946) and the IRS pages on depreciation and bonus depreciation provide the legal detail and current-year limits.)

• IRS Pub. 946: https://www.irs.gov/publications/p946
• IRS overview on depreciation: https://www.irs.gov/newsroom/understanding-depreciation
• TCJA text and legislative history: https://www.congress.gov/bill/115th-congress/house-bill/1

What changed (concise list)

• Section 179: The TCJA increased the maximum Section 179 expensing amount and indexed it for inflation. The deduction allows an immediate write-off for qualifying business property placed in service during the tax year.
• Bonus depreciation: TCJA introduced 100% bonus depreciation for qualified property placed in service after Sept. 27, 2017. That provision was temporary and is scheduled to phase down (100% for eligible property in the early years, then 80%, 60%, 40%, 20% in subsequent years unless Congress acts).
• Used property: The TCJA expanded bonus depreciation to include certain used property that meets specific purchase and use tests.
• Interaction with regular MACRS: These immediate-expensing options operate alongside the Modified Accelerated Cost Recovery System (MACRS) for assets that aren’t fully expensed.

See our internal deep dives on Section 179 and Bonus Depreciation for examples and edge cases: Section 179 Deduction, Bonus Depreciation, and a refresher on How to calculate depreciation.

How the two main tools differ

• Section 179

• Designed primarily for small and medium-sized businesses.

• Allows you to elect to expense qualifying property up to an annual limit (the dollar limit and the phase-out threshold are indexed and change by tax year).

• Subject to taxable-income limitations — you generally cannot create or increase a net loss for the year using Section 179.

• Useful when you want to control which assets you expense and when you want to limit the deduction to current-year taxable income.

• Bonus depreciation

• Applies automatically to qualifying property unless you elect out for a class of property.

• Not constrained by taxable-income limits — it can create or increase a net loss in the tax year.

• Historically allowed 100% expensing for qualified property for a period of years after TCJA and then phases down according to statutory schedule.

Choosing between them often depends on taxable income, whether you want to preserve losses, and state tax rules (some states do not follow federal bonus depreciation or have different rules for Section 179).

Practical examples (simplified)

Example A — You have strong taxable income in Year 1

• Purchase: $300,000 of qualifying machinery placed in service.
• Strategy: Elect Section 179 to expense the full $300,000 (if under the year’s Section 179 cap and you have sufficient taxable income). Result: immediate full deduction reduces taxable income in Year 1 and improves cash flow.

Example B — You expect a loss in Year 1 and want to carry deductions forward

• Purchase: $300,000 of qualifying property but Year 1 profits are low.
• Strategy: Use bonus depreciation (if available) because it can create or increase a net operating loss that could be carried forward (subject to NOL rules). Alternatively, defer expensing or take partial Section 179 to avoid losing tax benefits to limitations.

Always run both scenarios with your tax software or advisor — the optimal approach depends on recovery periods, AMT considerations for some taxpayers, and multi-year tax planning.

Common pitfalls and pitfalls to avoid

• Relying solely on federal rules: Some states do not conform to federal bonus depreciation or have separate Section 179 rules. Check your state’s Department of Revenue guidance.
• Missing listed-property rules: Business use percentage matters for items like vehicles and some electronics. If business use drops below required levels, you may need to recapture depreciation.
• Ignoring recapture: When you sell or convert an asset, some of the accelerated depreciation may be recaptured as ordinary income (e.g., Section 1245 recapture rules for equipment). This can create a taxable event in the year of sale.
• Incorrect classification: Not all purchases qualify. Land, for example, is not depreciable; certain improvements and intangible costs have distinct treatment.

Recordkeeping and compliance checklist

1. Save invoices, purchase agreements, and proof of when the asset was placed in service.
2. Track business-use percentage for vehicles and listed property (mileage logs, business use logs).
3. Use Form 4562 to claim Section 179 and depreciation (including bonus depreciation) on your tax return (see IRS Form 4562 instructions via IRS Pub. 946).
4. Keep a fixed-asset register (acquisition date, cost basis, useful life, accumulated depreciation, dispositions).

Reference: IRS Form 4562 and Publication 946 explain how to report depreciation and Section 179 elections (https://www.irs.gov/forms-pubs/about-form-4562; see IRS Pub. 946 at https://www.irs.gov/publications/p946).

State tax considerations

Many states decouple from federal bonus depreciation or have different Section 179 limits and phase-out rules. That means a deduction taken on your federal return may be limited or disallowed at the state level, creating timing differences and potential state tax adjustments. Before you apply a full federal write-off, verify state conformity.

Strategies I use with clients (practical guidance)

• Run a before-and-after cash-flow and tax-projection scenario. In some years, it’s better to spread deductions to avoid dropping into a lower bracket or to preserve credits.
• Consider partial Section 179 or electing out of bonus depreciation for specific asset classes to smooth taxable income across years.
• Coordinate capital purchases with business-cycle timing: buying before year-end can accelerate tax benefits to the current tax year, but buying earlier in a slow year might generate NOLs with separate rules.
• For closely held businesses, evaluate how depreciation choices affect shareholder-level taxes (S corporations, partnerships) and distributions.

Depreciation recapture and disposition rules — what to expect

If you sell or convert real property or equipment after claiming accelerated depreciation, you may have to recapture part of the gain as ordinary income. For most tangible personal property (equipment), Section 1245 recapture applies; different rules apply for real property (Section 1250).

When to consult a tax professional

• If you have large capital purchases relative to revenue (e.g., >20% of gross receipts).
• When you’re multi-state or have complex ownership (controlled groups, related entities).
• If you expect to sell assets within a few years of purchase or plan to change business-use percentages.

In my practice, I routinely run three-year tax projections when clients consider large equipment purchases; those projections often change whether we take full Section 179, partial Section 179, or rely on bonus depreciation.

Useful resources and next steps

• Read IRS Publication 946: How To Depreciate Property for legal detail (https://www.irs.gov/publications/p946).
• Review the official IRS guidance on depreciation and bonus depreciation (https://www.irs.gov/newsroom/understanding-depreciation).
• For a focused primer on the mechanics and examples, see our FinHelp guides: Section 179 Deduction, Bonus Depreciation, and How to calculate depreciation.

Bottom line

The TCJA-era changes gave many small businesses more ability to accelerate deductions through expanded Section 179 limits and the temporary availability of bonus depreciation (including for some used property). These rules can improve cash flow and free capital for reinvestment, but they come with tradeoffs: potential recapture on sale, state tax differences, and the need for disciplined recordkeeping.

Professional disclaimer: This article is educational and not personalized tax advice. Tax law changes; check current IRS guidance and consult a qualified CPA or tax advisor for decisions that affect your tax return.