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

How it’s calculated

2026 deductions apply in a fixed order:

  1. §179      = min(equipment cost, $1,160,000 cap)
                 capped at taxable business income;
                 cannot create a net operating loss

     §179 phase-out (per §179(b)(2)):
       purchases ≤ $2,890,000  → full $1,160,000 cap
       purchases > $2,890,000  → cap − (purchases − $2,890,000)
       purchases ≥ $4,050,000  → §179 = $0

  2. Bonus     = 0.20 × (equipment cost − §179 taken)
                 2026 rate is 20%; no income cap;
                 can create or deepen a loss

  3. MACRS     = remaining basis recovered over later years
                 (5-yr class, half-year convention:
                  20%, 32%, 19.2%, 11.52%, 11.52%, 5.76%)

Worked example — $1,500,000 placed in service in 2026:
  §179   = $1,160,000
  Bonus  = 0.20 × ($1,500,000 − $1,160,000) = $68,000
  MACRS  = remaining $272,000 over years 1–6

Assumptions: all figures are for the 2026 tax yearunder current law — the $1.16M §179 cap, the $2.89M phase-out threshold, and the 20% bonus rate all change year to year, and bonus depreciation drops to 0% for property placed in service in 2027 and beyond absent new legislation. The example assumes a profitable business with no taxable-income limitation. Depreciation rules are fact-specific—consult your CPA before relying on any of these numbers for a real purchase decision.

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, per IRC §179(b)(2), 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 (P.L. 115-97) set bonus depreciation at 100% for property placed in service from September 2017 through 2022 per former IRC §168(k)(6). Then the phase-down began:

Most depreciable tangible property qualifies per IRC §168(k)(2). The rate applies to the remaining basis after any §179 deduction is taken first per IRC §168(k)(1)(A). 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 per IRC §168(e)(1) and (c)(1): 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 per IRC §168(d)(1) 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

Per IRC §179(b)(2), 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

Per P.L. 115-97 §13201 (Tax Cuts and Jobs Act of 2017), under current law, bonus depreciation drops to 0% for property placed in service in 2027 and beyond (unchanged by subsequent legislation as of this writing). 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

Tony Nitti — Partner at EY and a Forbes contributor covering federal tax since 2012 (“Taxes: The Nitti Gritty”) — is one of the most widely-cited practitioner voices on §179, §168(k) bonus depreciation, and the §199A qualified business income deduction. His practitioner perspective reinforces the point that the statutory interaction between these provisions is where most planning errors happen: operators apply them in the wrong order, fail to account for the taxable income limitation on §179, or conflate the rate-phase-down schedule with a single applicable rate. The mechanics in this article follow the statutory sequence directly from IRC §179 and §168(k), consistent with IRS Publication 946 — the same primary sources Nitti's practitioner work draws from.

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.

In my experience as an operator, the most expensive mistake here is not the rate—it’s the order. Most years, for equipment under the $1.16M §179 cap, §179 quietly does the entire job and the 20% bonus rate never even comes into play. I’ve seen founders stack a December equipment purchase specifically to “capture bonus depreciation” when §179 alone already zeroed out their taxable income, and the loss-year case is the one that catches people off guard—that’s exactly where reaching for bonus instead of §179 actually changes the math. None of this is tax advice; it is a general operator observation, and the year-specific numbers and your own facts should be confirmed with your CPA.

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