Full Expensing: Permanent Bonus Depreciation and Section 179 Caps

Full expensing lets a business deduct the entire cost of qualifying equipment, vehicles, software, and certain building improvements in the year the asset goes into service, rather than spreading the deduction over five, seven, or thirty-nine years. It works through two separate provisions of the Internal Revenue Code: bonus depreciation under Section 168(k) and the Section 179 election. For property placed in service in 2026, bonus depreciation sits at a permanent 100 percent with no dollar ceiling, while Section 179 caps out at a $2,560,000 deduction and carries an income limit that bonus depreciation does not.

The cash-flow difference against regular depreciation is real. A $100,000 machine classified as five-year property under the Modified Accelerated Cost Recovery System yields about a $20,000 first-year deduction under standard rules. Fully expensed, the same $100,000 hits your return in year one. For a company in the 21 percent corporate bracket, that shifts roughly $21,000 of tax savings into the current year instead of trickling it out over five.

Bonus Depreciation at 100 Percent, Now Permanent

Bonus depreciation is the broader tool. It applies automatically to qualifying property unless you elect out, has no dollar ceiling, and has no income limitation. Under the 2017 Tax Cuts and Jobs Act the 100 percent rate had been scheduled to phase down, dropping to 40 percent for 2025. The One Big Beautiful Bill Act, signed in 2025, restored a permanent 100 percent additional first-year depreciation deduction for qualified property acquired and placed in service after January 19, 2025.¹ There is no phase-down schedule and no expiration date.

Watch the acquisition date. Both the acquisition and the placed-in-service date must fall after January 19, 2025, for the permanent 100 percent rate to apply. Property you contracted to buy before January 20, 2025, but didn’t place in service until later generally stays under the old 40 percent rate for 2025.¹

Bonus depreciation can exceed your taxable income. A $500,000 equipment purchase against $300,000 of business profit produces a $200,000 net operating loss that carries forward to reduce taxable income in future years. That makes it particularly useful for businesses making large capital investments during years of modest revenue.

Section 179 in 2026: Caps, Phase-Out, and the Income Limit

Section 179 lets you elect to expense qualifying property, and it comes with guardrails bonus depreciation does not have. The base amounts under the statute are $2,500,000 (maximum deduction) and $4,000,000 (phase-out threshold), with inflation adjustments beginning for tax years after 2025.² For 2026 the inflation-adjusted figures are $2,560,000 and $4,090,000. Once total qualifying property placed in service during the year exceeds $4,090,000, the $2,560,000 maximum drops dollar for dollar. A business placing $6,650,000 or more in service during 2026 loses Section 179 entirely.

The bigger practical constraint is the income limit. Section 179 cannot create or increase a net operating loss. Your deduction is capped at aggregate taxable income from all active trades or businesses for the year. Put $400,000 of qualifying equipment in service against $150,000 of business income and your deduction stops at $150,000; the unused $250,000 carries forward to a future year with enough income to absorb it.²

That is the central difference between the two tools. A startup burning cash gets little from Section 179 but can bank a large NOL through bonus depreciation.

Which Assets Qualify

Both provisions cover tangible personal property used in a trade or business: machinery, equipment, computers, office furniture, and vehicles used more than 50 percent for business. Used property qualifies under both methods, so long as the asset is new to your business.³

Qualified Improvement Property, meaning interior improvements to a nonresidential building made after the building was first placed in service, qualifies under both. It does not include work that enlarges the building, adds elevators or escalators, or alters the internal structural framework. Section 179 goes further for nonresidential buildings, covering roofs, HVAC, fire protection and alarm systems, and security systems.⁴ Off-the-shelf computer software available to the general public qualifies for Section 179 when used for business.

Land, inventory, and buildings themselves remain ineligible for either form of full expensing.⁴

Vehicles Have Their Own Limits

Vehicles are where businesses most often overestimate their write-off. The IRS caps annual depreciation on passenger automobiles regardless of which expensing method you use, and the caps depend on the vehicle’s gross weight rating.

Passenger Automobiles Under 6,000 Pounds

For passenger vehicles placed in service in 2026 that qualify for bonus depreciation, the first-year deduction is capped at $20,300. Without bonus depreciation, the first-year cap is $12,300. Later-year caps run $19,800 in year two, $11,900 in year three, and $7,160 for each year after.⁵ A $55,000 sedan used entirely for business will not produce a $55,000 first-year deduction no matter how you slice it.

Heavy Vehicles Over 6,000 Pounds

Vehicles with a gross vehicle weight rating above 6,000 pounds but no more than 14,000 pounds escape the passenger caps and instead face a separate Section 179 limit of $32,000 for 2026. Vehicles above 14,000 pounds, or those modified for dedicated commercial use such as cargo vans without rear seats, face no Section 179 limit at all. Any cost above the $32,000 Section 179 cap on a heavy vehicle can still be picked up through bonus depreciation, which often produces a full first-year write-off of the purchase price.

The 50 Percent Business-Use Threshold

Any vehicle or other listed property must be used more than 50 percent for qualified business purposes to qualify for Section 179 or bonus depreciation. If business use drops to 50 percent or below in a later year, you have to recapture the excess depreciation previously claimed. The recapture equals the difference between what you actually deducted and what you would have deducted under the slower straight-line method used by the alternative depreciation system, and it shows up as ordinary income in the year business use falls below the threshold.³

Recapture When You Sell

Full expensing gives you the deduction up front, and the IRS collects some of it back when you sell. Under Section 1245, gain on the sale of depreciable personal property is taxed as ordinary income to the extent of all depreciation previously deducted. Section 179 deductions are treated the same as depreciation for this purpose.⁶

Take a $100,000 machine expensed in full in year one. Adjusted basis drops to zero. Sell it three years later for $40,000 and the whole $40,000 is ordinary income at your regular rate, not capital gains. The trap is common with vehicles: fully expense a $60,000 truck, trade it in three years later for $30,000, and you have $30,000 of ordinary income on the trade. Factor recapture in before committing to a full write-off on something you plan to replace.

State Tax Treatment Often Differs

Federal full expensing doesn’t automatically flow through to your state return. Roughly two-thirds of states have historically decoupled from federal bonus depreciation, and many impose lower caps on Section 179. A decoupled state usually requires you to add the federal bonus deduction back and depreciate the asset over its useful life for state purposes, then allows a subtraction in later years as state depreciation catches up. That creates a timing mismatch and requires separate depreciation schedules for state and federal purposes.

Using Both in the Same Year

You do not have to choose one method. The standard approach is to apply Section 179 first, up to its limits, and then let bonus depreciation absorb the rest. That ordering is automatic on Form 4562: Section 179 reduces the depreciable basis first, and bonus depreciation applies to whatever remains.

Heavy SUVs: claim the $32,000 Section 179 cap, then apply 100 percent bonus depreciation to the balance and often deduct the entire vehicle in year one.
Income management: because Section 179 is elective and you pick the dollar amount, it lets you fine-tune how much income to shelter in a given year. Bonus depreciation is all-or-nothing within a MACRS class.
Loss planning: with low business income, Section 179 stops at your taxable income floor while bonus depreciation keeps going and creates a carryforward NOL.

How to Claim It on Form 4562

Both deductions go on IRS Form 4562, Depreciation and Amortization, attached to your business return for the year the property was placed in service.⁷

Section 179 is reported in Part I. You enter the cost of qualifying property and the deduction you are electing. It is an affirmative election, so you have to claim it.⁸
Bonus depreciation is reported in Part II and applies automatically unless you elect out. To opt out, attach a statement to your timely filed return; the election applies to every asset in the same MACRS class placed in service that year and is irrevocable once filed.⁸

Electing out of bonus depreciation on a class can make sense when you expect to be in a higher bracket in future years, or when you want to avoid recapture on assets you plan to sell soon.

Keep records for every asset you expense: purchase invoices, dates placed in service, and business-use percentages. The IRS requires you to hold these until the statute of limitations expires for the year you dispose of the property, which for a long-held asset can stretch well past a decade. If you got the property in a tax-free exchange, keep records on the property you traded away as well.⁹

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
3
Internal Revenue Service. Publication 946 – How To Depreciate Property
4
Internal Revenue Service. Topic No. 704, Depreciation
5
Internal Revenue Service. Rev. Proc. 2026-15
6
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
7
Internal Revenue Service. About Form 4562, Depreciation and Amortization
8
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
9
Internal Revenue Service. How Long Should I Keep Records?