Section 179 Deduction for Business Equipment: How it Works

The Section 179 deduction, combined with bonus depreciation, is a powerful tax break—enabling commercial businesses to write off the full cost of equipment, or most of it, in a single year. But act soon, as bonus depreciation will gradually expire over the next few years.

What is Section 179?

One of the biggest and best business tax breaks on the books is the Section 179 deduction. Under Section 179 of the Internal Revenue Code, a business may elect to expense—in other words, immediately deduct—the cost of any business property placed in service during the year, within generous limits.

A business can sweeten the pot by claiming a deduction for first-year bonus depreciation on the same qualifying property. This approach may deliver an unprecedented one-two tax punch that could result in a write-off of virtually the entire cost of the property in just one year—even if all or part of that cost is financed.

For example, if your industrial enterprise buys qualifying property for $1 million—and finances $750,000 using an equipment loan—your business may still be able to deduct the full amount, subject to some restrictions described below.

How does Section 179 work?

Any type of business entity—whether a C corporation, an S corporation, a partnership, a limited liability company or a sole proprietorship—is eligible to claim the Section 179 deduction for the cost of qualified business property placed in service during the year, subject to an annual limit.

Under this definition, eligible business property includes most tangible assets such as equipment or machinery, furniture, and off-the-shelf computer software, but not intangible assets such as patents and copyrights. The physical property acquired may be either new or used.

For example, if your C corporation acquires a $5,000 machine and places the machine in service in 2024, you can generally deduct $5,000 on your 2024 tax return.

Note that qualified property is considered placed in service when it is available for a specific use in your business. In other words, you may claim the deduction for a machine that's installed on a manufacturing plant floor or for a house that's ready and available to rent.

Section 179 limits

The IRS imposes an annual limit on the Section 179 deduction that a business can claim. This maximum amount has gradually increased, in fits and starts, over the last few decades. As recently as 2000, the annual limit was only $20,000. In 2003, the limit was raised to $100,000, with a provision for inflation indexing.

But the most significant change came courtesy of the Tax Cuts and Jobs Act, or TCJA. Beginning in 2018, the TCJA doubled the existing limit of $500,000 to $1 million, plus inflation indexing.

For 2024, the limit is expected to be $1.22 million—up from $1.16 million in 2023. Unlike numerous other changes made as a result of the TCJA, the increases to the annual limit are permanent.

Other Section 179 restrictions

The maximum annual limit isn't the only caveat businesses face when trying to make use of Section 179. Two other key tax law limits could affect your buying decisions.

1. Annual income limit: The Section 179 deduction you claim on your return can't exceed the net taxable income from all your business activities . For example, if your business income for the year is $500,000, your Section 179 deduction is limited to $500,000, even though the maximum allowed for the year is much higher.
2. Annual phaseout limit: If your total cost of qualified property placed in service during the year exceeds the annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This dollar threshold is adjusted in lockstep with the maximum Section 179 deduction amount. The limit for 2024 is $3.05 million—up from $2.89 million in 2023.

As an example of a deduction on a dollar-for-dollar basis: If the cost of your qualified property exceeds the $3.05 million threshold by $500,000, the maximum deduction is reduced to $2.55 million.

The impact of bonus depreciation

In many instances, Section 179 will provide an immediate tax deduction for the entire cost of qualified property placed in service during the year. However, if either of the two limits explained above comes into play or the cost exceeds the annual maximum, your business can also benefit from first-year bonus depreciation. This may be especially helpful for large commercial businesses with costly equipment needs.

Like the Section 179 deduction, the bonus depreciation deduction has gradually increased over time. In fact, the TCJA increased it to 100% for qualified property placed in service after September 27, 2017, and before January 1, 2023, subject to a subsequent five-year phaseout as follows.

• 80% in 2023
• 60% in 2024
• 40% in 2025
• 20% in 2026
• 0% in 2027

After 2026, no bonus depreciation deduction is available unless Congress reinstates or modifies this tax break.

For these purposes, qualified property includes business property with a cost recovery period of 20 years or less, depreciable software not amortized over 15 years, qualified leasehold improvements and water utility property. Note that the same property may qualify for both Section 179 and first-year bonus depreciation.

Coordination with MACRS

Finally, any remaining cost may be depreciated over time. Many businesses use the Modified Accelerated Cost Recovery System, or MACRS, rather than straight-line depreciation for faster cost recovery. MACRS relies on a percentage based on the useful life of the property. Most business property—including furniture and appliances—is considered 7-year property, although computers and vehicles are classified as 5-year property.

The tax breaks are applied in this order: (1) Section 179, (2) bonus depreciation and (3) MACRS.

Example: Your C corporation claims the maximum Section 179 deduction and 60% first-year bonus depreciation for 2024 and has a remaining balance of $1 million for 7-year property. The applicable MACRS percentage for the first year is 14.29%, so your business can claim a MACRSdeduction of $142,900 in 2024.

Section 179 rules for vehicles

One restriction to consider when acquiring commercial vehicles: Section 179 deductions for business vehicles are limited by the luxury car rule.

Although businesses may combine Section 179 with bonus depreciation for vehicles, there are some constraints. In 2023 , the maximum combined deduction for a vehicle used 100% of the time for business was $20,200. Plus, a business can claim MACRS on the remainder.

Taking action now

Section 179 provides a unique opportunity for a near-instant cost recovery of high-priced property. With astute planning and professional guidance, your firm can maximize the tax benefits and avoid the potential pitfalls.

To learn more about financing the acquisition of business equipment, see our comprehensive guide to equipment financing and leasing options.

Key takeaways

• Under Section 179, businesses can deduct the cost of business property placed in service during the year, within generous limits.
• Businesses can also claim first-year bonus depreciation on the same property if it qualifies—although this deduction is being gradually phased out over the next few years.
• This combination of deductions could result in a write-off of virtually the entire cost of the property in just one year—even if all or part of that cost is financed.
• Any remaining cost may be depreciated over time.