Section 179 vs Bonus Depreciation — The 2026 Phase-Down Explained

What Section 179 does

IRC §179 lets a business immediately deduct the full cost of qualifying tangible property placed in service during the tax year, instead of spreading that deduction across years through normal depreciation. For 2026, the deduction limit is $1,160,000, per the IRS annual inflation-adjustment process (see IRS Newsroom for the most recent revenue procedure). Most businesses can use it —not just C-corps. Pass-through entities including S-corps, partnerships, and sole proprietors all qualify.

Two limits matter. First, the annual per-business dollar cap ($1.16M for 2026). Second, the phase-out: once your total qualifying equipment placed in service in a single year exceeds $2,890,000, the §179 deduction shrinks dollar-for-dollar. Place more than $4,050,000 in service and the deduction disappears entirely for that year.

One important constraint the phase-out math glosses over: §179 cannot create or expand a net operating loss. The deduction is capped at your taxable business income for the year. If your business is running a loss—or the §179 deduction would push you into one—the excess carries forward to future years. That's distinct from bonus depreciation, which has no income cap. Per IRS Publication 946 and IRC §179.

What bonus depreciation (§168(k)) does

Bonus depreciation under IRC §168(k) works differently from §179 in two important ways: it has no annual cap on the deduction itself, and it has no taxable-income limitation. A business in a loss year can take bonus depreciation and make that loss bigger—generating a net operating loss that carries forward.

The catch is the phase-down. The Tax Cuts and Jobs Act of 2017 set bonus depreciation at 100% for property placed in service from September 2017 through 2022. Then the phase-down began:

Most depreciable tangible property qualifies. The rate applies to the remaining basis after any §179 deduction is taken first. See IRS Publication 946 for the full list of qualifying property classes and the original TCJA schedule.

How they stack—the order matters

When you place new equipment in service during a tax year, the deductions apply in a fixed sequence. This is not a choice; it is the statutory order under current IRS guidance.

1. Step 1 — §179 deduction. Apply up to the annual cap ($1.16M for 2026) against your taxable business income. Cannot create an NOL. Phases out above $2.89M of qualifying purchases placed in service.
2. Step 2 — Bonus depreciation. Apply the 2026 rate (20%) to the remaining basis—equipment cost minus whatever §179 covered. This can create or deepen an NOL. No income cap, no annual dollar limit.
3. Step 3 — MACRS depreciation.Whatever basis remains after both §179 and bonus depreciation is recovered under the standard MACRS schedule. Most business equipment uses the 5-year class with the half-year convention: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76% over six tax years (per IRS Pub 946 Table A-1, the half-year convention pushes year 1's half-year into year 6).

Worked example: $1.5M equipment placed in service in 2026, profitable business, no taxable-income limitation, 21% marginal tax bracket.

The remaining MACRS basis of $217,600 ($272,000 − $54,400 taken in year 1) continues through years 2–6 at the 5-year half-year rates. Total lifetime tax savings across all three mechanisms equals 21% of $1,500,000 = $315,000. The difference is just timing: §179 and bonus pull deductions into year 1; MACRS spreads the rest across years 2–6.

When does each rule apply differently?

The statutory order is fixed, but which mechanism does most of the work varies by situation.

Scenario 1: Profitable business, equipment cost under $1.16M

This is the common case. §179 absorbs the full basis in year 1. The 20% bonus depreciation rate only matters once you breach the cap. For a $500,000 equipment purchase at a 21% bracket, §179 alone produces $105,000 in year-1 tax savings. Bonus depreciation adds nothing because there is no remaining basis to apply it to. The after-tax economics are the same as if bonus depreciation did not exist.

Scenario 2: Loss-year business or startup

A startup with $500,000 of equipment and a net operating loss before that equipment purchase should use bonus depreciation instead of §179on that asset. Why? Because §179 cannot deepen a loss, but bonus depreciation can. Taking bonus depreciation on equipment in a loss year produces an NOL that carries forward to profitable years and offsets future taxable income. Taking §179 on the same equipment in a loss year produces a carryforward, but only to the extent of the amount that exceeded the taxable income limit—and the mechanics are more constrained. If your intention is to maximize total tax benefit over the life of the business rather than year 1 specifically, and your business is currently losing money, bonus depreciation is the primary tool for newly placed equipment.

Scenario 3: Above the §179 phase-out threshold

Once you place more than $2,890,000 of qualifying equipment in service during 2026, the §179 deduction starts shrinking. Every dollar above $2,890,000 reduces the deduction by one dollar. Place $4,050,000 or more in service and §179 is completely gone for the year. In that position, bonus depreciation becomes the only immediate-expensing mechanism, even at the 20% 2026 rate. A business placing $5,000,000 in equipment in 2026 receives zero §179 and $1,000,000 in bonus depreciation ($5M × 20%), with the remaining $4,000,000 going into MACRS. The tax savings on the bonus slice at a 21% bracket is $210,000 in year 1—real money, even at the lower 2026 rate.

The 2026 cliff and what comes after 2027

Under current law—the TCJA 2017 statutory schedule, unchanged by subsequent legislation as of this writing—bonus depreciation drops to 0% for property placed in service in 2027 and beyond. There is no automatic extension. Congress has extended bonus depreciation before and may do so again, but capital planning that depends on an extension is speculative.

The practical implication for 2026 is real: equipment placed in service by December 31, 2026 locks in the 20% bonus rate on any basis above the §179 cap. Equipment placed in service on January 1, 2027 captures nothing from bonus depreciation under current law. For businesses near the §179 phase-out range—buying between $2.89M and $4.05M in equipment—the timing gap between late December and early January is the difference between a meaningful immediate deduction and pure MACRS spread over years.

The interaction also matters for businesses planning large capital expenditures across two years. Spreading a $3M purchase across 2026 and 2027 (say, $1.5M each year) keeps both tranches under the §179 phase-out threshold and captures 20% bonus depreciation on the 2026 tranche above the cap—rather than losing the bonus deduction entirely on the 2027 half. That's a planning decision worth running through a calculator with your actual numbers and tax bracket before you sign a purchase order.

The bottom line on the 2026 math

Section 179 and bonus depreciation are not interchangeable. §179 applies first, has a dollar cap, and cannot create a loss. §168(k) bonus depreciation applies to whatever remains, has no cap, and can deepen a loss. In 2026 they stack in that order, with bonus at 20%—the last meaningful rate before the TCJA schedule reaches zero. Most businesses buying under $1.16M of equipment see the entire benefit from §179. Businesses buying above the cap, or buying at a loss, need bonus depreciation as a second mechanism. And 2026 is the last year where that second mechanism contributes anything under current law.

Sources: IRS Publication 946 — How To Depreciate Property · IRC §179 · IRC §168(k) · IRS Newsroom (annual inflation adjustments).