Section 179 vs. Bonus Depreciation – Key Differences & 2025 Tips

Updated: February 2025

Business owners and tax professionals know that choosing the right method to depreciate new equipment can dramatically affect your tax liability. Both the Section 179 deduction and bonus depreciation accelerate write‑offs, but they differ in limits, timing, and overall impact on your taxable income. With bonus depreciation now in a phase‑down period (e.g., 40% in 2025, 20% in 2026), understanding these nuances is more critical than ever. This guide combines tactical bullet‑point clarity with in‑depth analysis to help you choose—and coordinate—the right strategy for your business.

Key Differences at a Glance

• Deduction Limits:
  • Section 179: Has a defined maximum deduction (e.g., $1,250,000 for 2025) and a spending cap (e.g., $3,130,000 for 2025) that reduces the deduction dollar‑for‑dollar when exceeded.
  • Bonus Depreciation: No overall dollar limit, but currently subject to a phase‑down schedule.
• Timing & Phase‑Down:
  • Section 179: A permanent part of the tax code with annual inflation adjustments.
  • Bonus Depreciation: Temporarily enhanced but scheduled to decrease:
    • 2024: 60%
    • 2025: 40%
    • 2026: 20%
    • 2027+: Potentially 0% (subject to legislative change)
• Income Limitations:
  • Section 179: Limited by your business’s taxable income (cannot create a loss).
  • Bonus Depreciation: Can create or increase a net operating loss, offering additional flexibility.

Overview:
Section 179 allows you to immediately expense the full cost of qualifying assets—such as machinery, vehicles, or software—rather than capitalizing and depreciating them over several years.

Core Benefits:

• Immediate Write‑Off: Deduct the full purchase price in the year the asset is placed in service.
• Flexibility: Choose which assets to expense, allowing precise control over your taxable income.
• Special Provisions: Enhanced benefits for vehicles and certain software acquisitions.

Current Limitations (2025):

• Maximum deduction: $1,250,000
• Spending cap: $3,130,000 (dollar‑for‑dollar reduction above this threshold)
• Deduction cannot exceed business taxable income (excess can be carried forward)

Example: A small manufacturer purchasing $800,000 in new equipment can fully expense the cost under Section 179, keeping its taxable income under control.

For more details, visit The Section 179 Deduction.

Overview:
Bonus depreciation accelerates your depreciation deductions by automatically applying a set percentage to all qualifying assets—without a spending cap.

How It Works:

• Applies to both new and used property with a recovery period of 20 years or less.
• Once you elect Section 179 for eligible assets, bonus depreciation automatically applies to the remaining depreciable basis—unless you specifically elect out.

Phase‑Down Schedule (Current Outlook):

• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027+: 0% (unless extended)

Key Advantages:

• Unlimited Deduction Amount: No cap on the total deduction.
• Flexibility in Loss Creation: Can generate or increase a net operating loss.
• Ideal for Large Investments: Particularly beneficial when equipment purchases exceed Section 179 limits.

Use our Section 179 Calculator to model your potential savings.

Section 179 is ideal when:

• Your total equipment purchases are within the annual cap.
• You need precise control over your deduction amounts.
• You are investing in assets with special rules (e.g., vehicles, certain software).

Bonus Depreciation is advantageous when:

• Your purchases exceed the Section 179 spending cap.
• You want to maximize your first‑year deduction – even if that creates a net operating loss.
• You are making significant investments in qualified improvement property (QIP) or other large‑scale assets.

Decision Factors to Consider:

• Current and Projected Income: How will each deduction affect your taxable income?
• Cash Flow Needs: Does accelerating your deduction help improve liquidity?
• State Tax Treatment: Some states do not conform fully to federal bonus depreciation.
• Long‑Term Business Goals: How do replacement cycles and future investments factor into your planning?
• Financing Considerations: Coordinate with financing options such as Section 179 Qualified Financing.

Example: A company investing $4 million in equipment might elect to expense $1,250,000 under Section 179 and then apply bonus depreciation on the remaining $2,750,000 to achieve the maximum first‑year benefit.

For more on electing these deductions, see Electing Section 179.

Many businesses benefit from a hybrid approach:

1. Apply Section 179 First: Elect the deduction on priority assets up to the annual limit.
2. Then Utilize Bonus Depreciation: Automatically write off the remaining eligible cost at the applicable bonus rate.
3. Finally, Use Standard MACRS: Depreciate any remaining basis over the asset’s recovery period.

Example: In 2025, a company with $3,500,000 in equipment investments might:

• Deduct $1,250,000 under Section 179,
• Claim 40% bonus depreciation on the next $2,250,000 (yielding $900,000),
• Depreciate the remaining $1,350,000 with MACRS schedules.

State Tax Impact:

• Some states fully conform to federal bonus depreciation, while others require specific adjustments or decouple altogether.
• Always review your state’s tax rules when planning deductions.

Qualified Improvement Property (QIP):

• Section 179: Under federal rules, QIP is generally ineligible for the Section 179 expense deduction (note that certain state rules may differ).
• Bonus Depreciation: QIP is treated as 15‑year property, making it eligible for bonus depreciation – which can significantly accelerate the first‑year deduction.

Documentation & Compliance:

Maintain meticulous records to support your deductions:

• Purchase dates, costs, and placed‑in‑service dates
• Business use percentages and asset classifications
• Copies of Form 4562 and related election statements

For additional guidance, see Property That Qualifies.

As bonus depreciation continues its phase‑down:

• Accelerate Purchases: Consider timing your capital investments to benefit from current bonus rates.
• Refine Your Strategy: Post‑2026, Section 179 may become your primary tool, so adjust your planning accordingly.
• Integrate Financing: Evaluate options like Section 179 Qualified Financing.

For comprehensive planning, consulting a tax professional is advised.

Conclusion & Recommendations

Both Section 179 and bonus depreciation are essential components of a well‑crafted tax strategy. Section 179 offers controlled, immediate expensing within strict limits, while bonus depreciation provides an uncapped, automatic deduction that can absorb larger investments—even creating net operating losses. By strategically coordinating both tools, you can maximize your first‑year deductions, improve cash flow, and optimize your overall tax profile.

Disclaimer: The content on this page is intended solely for general informational and educational purposes and does not constitute professional tax, legal, or financial advice. Although Section179.Org believes the information provided is accurate and current as of February 2024, tax laws, regulations, and policies are subject to change without notice. The discussion of Section 179, bonus depreciation, and related strategies—including comparisons, examples, and state-specific details—is provided “as is” and may not reflect the most current legal or regulatory developments. Section179.Org, its affiliates, and contributors assume no liability for any errors, omissions, or for any decisions or actions taken in reliance on this information. Users are strongly advised to consult with a qualified tax professional or legal advisor and verify the latest guidance from official sources before making any tax planning or business decisions.