Equipment Depreciation Deduction

Section 179: the immediate write-off

Section 179 is the closest thing the tax code has to a "buy it, deduct it" button. For 2026, you can write off up to $1,160,000 in qualifying equipment in the year you buy it — no multi-year depreciation schedules, no percentage calculations. The deduction covers tangible personal property: machinery, computers, office furniture, off-the-shelf software, and certain vehicles used more than 50% for business.

The phase-out threshold for 2026 is $2,890,000. Put more than that amount of equipment into service during the year, and your Section 179 deduction starts shrinking dollar-for-dollar. Hit $4,050,000 in total equipment purchases, and the deduction disappears entirely.

Here's the rule that trips people up: Section 179 can't create a net operating loss for your business. Your deduction is capped at your taxable business income for the year. If your business shows $40,000 in net income and you bought an $85,000 machine, you can only deduct $40,000 under Section 179. The remaining $45,000 carries forward to next year, and you can also use bonus depreciation on it in the meantime.

What qualifies? Tangible personal property you bought (not leased) and placed in service during the tax year. Off-the-shelf software counts. Real property doesn't — buildings, land, and structural components are out. Qualified improvement property for interior building renovations does qualify, but that's a niche use case. Vehicles over 6,000 lbs GVWR get special treatment — the full purchase price is eligible rather than being capped by the luxury auto limits.

The election is made on Form 4562. You can pick and choose which assets to apply Section 179 to — you don't have to use it on everything. That flexibility matters when you're stacking it with bonus depreciation.

Bonus depreciation: the percentage game

Bonus depreciation gives you an extra first-year deduction on top of regular MACRS depreciation — and unlike Section 179, it has no income limit and no dollar cap. Lose money this year? Bonus depreciation can create or increase a net operating loss that carries forward to offset future income.

For 2026, bonus depreciation sits at 20%. It's been phasing down since 2022, dropping 20 percentage points per year under the TCJA schedule:

• 2022: 100%
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027: 0% (scheduled)

Congress has extended or modified bonus depreciation several times in the past, so check the current rate before a large purchase. In practice at the 20% rate: you buy a $50,000 piece of equipment in 2026. Bonus depreciation gives you 20% ($10,000) in year one. The remaining $40,000 gets depreciated over the normal MACRS schedule for that asset class.

Bonus depreciation applies to new and used property — the used-property eligibility was a big deal when TCJA expanded it in 2018. It also covers a broader range of assets than Section 179, including qualified improvement property (interior renovations to non-residential buildings).

How it works in practice: you buy a $50,000 piece of equipment in 2026. Bonus depreciation gives you 60% ($30,000) in year one. The remaining $20,000 gets depreciated under MACRS over the asset's recovery period. Next year, with bonus at 40%, that same purchase would only get you a $20,000 first-year deduction.

MACRS: the standard approach

The Modified Accelerated Cost Recovery System (MACRS) is the default depreciation method when Section 179 and bonus depreciation don't apply — or when you choose not to use them. It spreads the cost of an asset over a set recovery period using accelerated depreciation (more in early years, less later).

The IRS sorts assets into property classes based on their expected useful life:

• 5-year property: Computers, office equipment, vehicles under 6,000 lbs GVWR, research equipment, and certain manufacturing tools. Most small business tech falls here.
• 7-year property: Office furniture, fixtures, and general-purpose equipment that doesn't fit neatly into 5-year. Desks, filing cabinets, shelving.
• 15-year property: Land improvements like sidewalks, fences, parking lots, and qualified improvement property for commercial buildings.

MACRS uses the 200% declining balance method switching to straight-line for 3-, 5-, 7-, and 10-year property, and the 150% declining balance for 15- and 20-year property. The half-year convention applies unless you placed more than 40% of your assets in service during Q4.

In plain English: a $10,000 computer (5-year property) depreciates roughly $2,000 in year one, $3,200 in year two, $1,920 in year three, then $1,152 in years four and five each, with a $576 remainder in year six. No bonus, no 179 — just the tax code grinding through its schedule.

For most small businesses, MACRS alone is the slowest option. But it becomes relevant when you've exhausted Section 179 or bonus depreciation, or when you're dealing with property that doesn't qualify for accelerated write-offs.

Section 179 vs. bonus vs. MACRS — which to use

There's no one-size-fits-all answer, but here's a practical decision framework for 2026:

Use Section 179 first if your business is profitable. It gives you a 100% write-off up to the $1,160,000 cap, and you can pick which assets to apply it to. This is the cleanest option — deduct it now, move on.

Use bonus depreciation if your business isn't profitable this year or you've hit the Section 179 income cap. Bonus depreciation creates or increases losses, which can carry forward. It also covers qualified improvement property that Section 179 misses. At 60% in 2026, it's still meaningful — but not the slam dunk it was at 100%.

Fall back on MACRS when neither Section 179 nor bonus depreciation apply, or when you're intentionally spreading deductions across future years — for example, if you expect your tax bracket to rise significantly.

The interplay gets nuanced when you have multiple large purchases. Work with a tax professional if you're putting more than $100,000 into equipment in a single year — the order you apply these elections matters and a wrong choice can cost thousands.

Listed property and the 50% rule

Certain assets get special scrutiny because people use them for both business and personal purposes. The IRS calls these "listed property" and they include:

• Passenger automobiles
• Computers and peripheral equipment
• Any property used for entertainment, recreation, or amusement

The key rule: to use accelerated depreciation (Section 179 or bonus depreciation) on listed property, you must use it more than 50% for business. Drop below 50% business use in any subsequent year, and you'll face recapture — paying back the excess depreciation you claimed.

If business use is 50% or less, you're stuck with straight-line depreciation over the asset's ADS (Alternative Depreciation System) life — generally longer and slower than MACRS. For a computer, that means 5 years of equal depreciation instead of the front-loaded MACRS schedule.

Documentation is everything. Keep a usage log — date, hours, and business purpose — covering a representative period. If the IRS asks and you can't produce it, they'll assume 100% personal use.

De minimis safe harbor: the $2,500 shortcut

Not every equipment purchase needs a depreciation schedule. The IRS's de minimis safe harbor lets you deduct items costing $2,500 or less per item (or per invoice) as a current-year expense — no depreciation, no Form 4562, just an ordinary business expense on your books.

This only works if you have an applicable financial statement (audited financials) or, for most small businesses, if you've adopted a written accounting policy stating you'll expense items under $2,500. Without that policy in place, the safe harbor drops to $500 per item.

A few things to know: the $2,500 is per item, not per invoice. Buy three $800 monitors, and each qualifies individually. The policy needs to be in writing and adopted before the tax year begins. And the deduction is still subject to the ordinary-and-necessary test — it's not a blank check.

For most small businesses, this is a paperwork saver more than a tax saver. The deduction result is the same as Section 179 for small items — you just avoid the depreciation forms. Talk to your accountant about adopting the policy; it takes five minutes and simplifies everything.

What happens when you sell depreciated equipment

Selling equipment you've depreciated triggers depreciation recapture — and it can create an ugly tax surprise if you're not expecting it.

Here's the basic mechanic: you bought a $40,000 machine, deducted $40,000 through Section 179 (cost basis is now $0), and sold it three years later for $18,000. That $18,000 is fully taxable as ordinary income — not capital gains. The IRS treats it as recapturing the depreciation you already claimed.

If you sell for more than the original purchase price, it gets trickier: depreciation recapture up to your total deductions (taxed as ordinary income), and anything above the original price is a capital gain (taxed at the lower capital gains rate).

For listed property with mixed business/personal use, recapture applies only to the business percentage you deducted. A car used 70% for business means only 70% of the gain is subject to recapture.

Recapture isn't a reason to avoid depreciation — you're still better off taking the deduction now and paying tax later. It's just a cost to factor into your selling calculus. If that $40,000 deduction saved you $9,600 in tax upfront and you pay $4,320 on recapture three years later, you're still ahead by $5,280 plus the time value of money.