Under current tax law, your business may be able to claim significant first-year depreciation write-offs for eligible assets that are placed in service in the current tax year. Two major options are the 100% first-year bonus depreciation deduction and the first-year Section 179 expensing election. These breaks can provide immediate tax savings under the right circumstances. Let's take a close look at each and then discuss some of the issues that can arise when choosing one or the other.
The One Big Beautiful Bill Act made the bonus depreciation deduction permanent for eligible new and used assets acquired after January 19, 2025, and placed in service in 2025 or later. That means you can buy qualified assets — generally defined as new and used tangible property with a recovery period of 20 years or less — and immediately deduct the full cost. And there's no overall dollar limit on how much bonus depreciation you may claim.
Some examples of assets that may be eligible for bonus depreciation are:
QIP is defined as an improvement to an interior portion of a nonresidential building placed in service after the building was initially put into use. However, expenditures attributable to elevators or escalators, or a building's enlargement or internal structural framework, are ineligible. They usually must be depreciated over 39 years.
The Sec. 179 expensing election also allows you to immediately deduct, rather than depreciate over several years, the full cost of eligible new and used assets bought and placed in service this year. However, for 2026, you can deduct only up to $2.56 million of qualifying asset purchases. And the tax break begins to phase out dollar for dollar when the cost of qualifying property placed in service during the year exceeds $4.09 million. Property generally must be used more than 50% for business to qualify.
Sec. 179 deductions may also be claimed for certain improvements to existing nonresidential buildings — including roofs, HVAC equipment, and alarm, security and fire protection systems. These improvements don't necessarily qualify for bonus depreciation. What's more, Sec. 179 generally lets you select individual assets and the amount to expense, while electing out of bonus depreciation generally applies to an entire property class placed in service during the year.
The right depreciation strategy isn't always obvious. The two first-year tax breaks aren't mutually exclusive. You can even claim both on different portions of an asset's cost — for instance, applying Sec. 179 first and bonus depreciation to the remaining eligible basis. Also, they're not always the best choice. In some cases, you may be better off following normal depreciation schedules that spread deductions over multiple years.
When devising your strategy, it's important to understand the key differences. Notably, Sec. 179 deductions are subject to the aforementioned dollar limits, which don't apply to bonus depreciation. Things can get especially tricky if you operate your business as a partnership, S corporation or limited liability company (LLC) treated as a partnership for tax purposes. In these cases, Sec. 179 limits can apply at both the entity and owner levels, though the phaseout calculations differ.
Another critical difference is that only Sec. 179 deductions are subject to the business income limitation. This means these write-offs can't create an overall business tax loss for the year — a situation that many small businesses face.
If the business income limitation disallows part of your Sec. 179 deduction, the disallowed amount is carried forward indefinitely until it's fully deducted. In a tax year when all or part of the Sec. 179 carryforward is used, that amount can reduce your taxable income and, for sole proprietors and partners whose business income is subject to self-employment tax, net earnings from self-employment.
In contrast, if you claim a bonus depreciation deduction that pushes your personal taxable income into the negative, you'll usually have a net operating loss (NOL) for the year. Under current federal income tax rules, NOLs are carried forward indefinitely. However, you can generally offset only 80% of taxable income with NOL deductions.
Unlike bonus depreciation deductions, Sec. 179 deductions can't create or increase an NOL. For noncorporate business owners who are subject to self-employment tax, that distinction can be important.
If bonus depreciation creates an NOL, the loss can generally be carried forward and used to reduce taxable income in future years. However, NOL carryforwards generally don't reduce income subject to self-employment tax.
By contrast, a Sec. 179 deduction that's carried forward because of the business income limitation may reduce both taxable income and self-employment income when it's used in a later year. As a result, some business owners may realize greater overall tax savings from a Sec. 179 carryforward than from an NOL generated by bonus depreciation.
Both bonus depreciation and Sec. 179 deductions can trigger the "excess" business loss rule for noncorporate taxpayers. An excess business loss is the amount of total business losses for the year that exceeds an applicable threshold. For tax years beginning in 2026, the threshold is $256,000 ($512,000 for married couples filing jointly).
If you have an excess business loss, the disallowed amount generally becomes an NOL carryforward, as explained above. This defers the federal income tax deduction for that amount until a later tax year.
Important: A side effect of this rule is that an excess loss can't reduce your self-employment income in future years because it's treated as an NOL.
Let's say you run your small business as a single-member LLC that's treated as a sole proprietorship for federal tax purposes. Also suppose you're a joint filer whose spouse has no business income.
In 2026, you place in service $900,000 of depreciable assets that qualify for both bonus depreciation and Sec. 179 deductions. Before any depreciation deductions, your taxable business income is $400,000, and your taxable nonbusiness income is $300,000 — for a total of $700,000.
If you claim a bonus depreciation deduction of $900,000, you'll have a business loss of $500,000 ($400,000 taxable business income – $900,000 bonus depreciation deduction). And you'll have negative taxable income of $200,000 ($700,000 total taxable income – $900,000 bonus depreciation deduction).
You don't have an excess business loss because your $500,000 business loss is below the $512,000 excess business loss disallowance threshold. So your allowable business loss is $500,000, and the first $300,000 of the loss reduces your taxable nonbusiness income to zero.
Now assume that the remaining business loss of $200,000 creates an NOL of $150,000 after adding back applicable items to your negative taxable income. The $150,000 NOL won't provide any tax savings until 2027 at the earliest, and it won't reduce your self-employment income when you use it in a future year.
Now let's take the same scenario but say you claim a $900,000 Sec. 179 deduction instead. Because of the business income limitation, your 2026 write-off is limited to $400,000 — the amount of your taxable business income before the deduction. The remaining Sec. 179 deduction of $500,000 is disallowed and carried forward to future tax years. Although used Sec. 179 deduction carryover amounts reduce your future taxable and self-employment income, your 2026 taxable income remains $300,000 ($700,000 total taxable income – $400,000 Sec. 179 deduction).
So, what conclusions might we draw from these two scenarios? In our first scenario, the $900,000 first-year bonus depreciation deduction allowed you to zero out your 2026 taxable income and create a $150,000 NOL. However, in the second one, the $900,000 Sec. 179 deduction left you with $300,000 of 2026 taxable income and a $500,000 Sec. 179 deduction carryforward. That Sec. 179 deduction carryforward can reduce both your taxable and self-employment income in future years. But is that future tax benefit worth having $300,000 of taxable income in 2026? The answer depends on your expected income, tax rates and potential self-employment tax savings.
As you can see, there are considerable nuances to deciding whether to take a bonus depreciation or Sec. 179 deduction — or perhaps dividing the cost of qualifying assets between the two or even depreciating certain items over longer periods. The good news is you don't have to decide alone. Your tax advisor can model various scenarios and help you devise an optimal depreciation strategy for the 2026 tax year and beyond.
Get in touch today and find out how we can help you meet your objectives.
