Section 179 vs. Bonus Depreciation

Section 179 vs. Bonus Depreciation: Which Saves You More in 2025?

For small and mid-sized business owners, understanding the difference between Section 179 expensing and bonus depreciation is key to maximizing tax savings and managing cash flow. Both provisions allow accelerated deductions for the cost of equipment and property—but they operate differently and can have very different impacts on your tax liability.

Here’s what business owners need to know about eligibility, deduction limits, strategy, and how to use both to your advantage in 2025.

 

1. Eligibility and Property Requirements

Section 179

Section 179 applies to tangible personal property acquired by purchase for use in the active conduct of a trade or business.

Eligible property includes machinery, equipment, vehicles, furniture, and certain qualified improvement property (QIP) such as improvements to nonresidential real property (e.g., roofs, HVAC, fire protection, and security systems).

However, land and buildings do not qualify under Section 179.

Bonus Depreciation

Bonus depreciation covers a broader range of property, including new and used tangible property with a recovery period of 20 years or less.

This includes land improvements (like parking lots and landscaping), QIP, and other short-lived assets.

Unlike Section 179, bonus depreciation is not limited by business income and can be claimed on used property, provided it wasn’t previously used by the taxpayer.

Learn more: IRS Publication 946 – How to Depreciate Property

 

2. Deduction Limits and Phase-Outs

Section 179

• 2025 deduction limit: $2,500,000

• Phase-out threshold: Begins at $4,000,000 of qualifying property placed in service.

• The deduction is reduced dollar-for-dollar by the amount exceeding the phase-out threshold.

• Section 179 cannot create or increase a Net Operating Loss (NOL)—it’s limited to business income, but unused deductions can be carried forward indefinitely.

Bonus Depreciation

• No dollar limit or phase-out threshold.

• For property acquired and placed in service after January 19, 2025, the bonus rate returns to 100%.

• For property acquired before that date, the rate is 40% for 2025, phasing down thereafter.

• Bonus depreciation can create or increase an NOL, which can be carried forward under NOL rules.

Reference: Internal Revenue Code §168(k)

 

3. Order of Application

When both apply:

1. Apply Section 179 first.
2. Apply bonus depreciation next.
3. Apply regular MACRS depreciation on the remaining asset basis.

This order ensures maximum first-year deductions.

 

4. Recapture Rules

Both Section 179 and bonus depreciation are subject to recapture if:

• The property’s business use drops to 50% or less, or

• The property is sold or disposed of before the end of its recovery period.

Any recaptured amount is added back as ordinary income in the year of disposition.

See details in IRS Publication 946, Chapter 2.

 

5. Strategic Considerations

Advantages of Section 179

• Flexibility: Can be applied on an asset-by-asset basis.

• Control: You can choose which assets to fully expense and which to depreciate.

• Carryforward: Unused deductions can roll forward if business income limits apply.

• Ideal for: Small to mid-sized businesses with moderate capital spending.

Advantages of Bonus Depreciation

• No income limitation: Can create or increase a business loss.

• No dollar cap: Perfect for large capital expenditures.

• Applies to used property: Broader eligibility than Section 179.

Combining Both for Maximum Benefit

Many businesses combine Section 179 and bonus depreciation:

• Use Section 179 to fully expense lower-cost assets up to the annual limit.

• Apply bonus depreciation to higher-cost assets or remaining basis amounts.

This combination allows for maximum immediate deductions while maintaining flexibility.

 

6. Special Considerations

• Qualified Improvement Property (QIP): Eligible for both Section 179 and bonus depreciation.

• Land Improvements: Eligible only for bonus depreciation.

• Trusts and Estates: Cannot claim Section 179 but can claim bonus depreciation.

• Noncorporate Lessors: Section 179 has restrictions; bonus depreciation often more favorable.

• Controlled Groups: Section 179 limits apply across the entire group as one taxpayer.

IRS resource: Instructions for Form 4562 – Depreciation and Amortization

 

7. Which Option Saves You More?

• Section 179 is best when you have taxable income and want to target specific assets for immediate expensing.

• Bonus depreciation is best for larger purchases, creating or increasing NOLs, or when you’ve already maxed out your Section 179 deduction.

Most tax-efficient strategy:

Use Section 179 first, then apply bonus depreciation to remaining qualifying assets.

 

8. Example: Combined Deduction Strategy

Example:

A business purchases $3,000,000 of qualifying equipment in 2025 and has $2,600,000 in taxable business income.

• Section 179: Deduct $2,500,000 (within the limit and below phase-out).

• Bonus Depreciation: Apply 100% on the remaining $500,000 basis.

• Total First-Year Deduction: $3,000,000.

If business income were only $1,500,000, Section 179 would be limited to that amount, with the remaining $1,000,000 carried forward. Bonus depreciation could still be applied to create or increase an NOL.

 

9. Conclusion

In 2025, Section 179 remains a powerful tool for targeted, immediate expensing up to the annual limit—especially for businesses with steady income.

Bonus depreciation offers broader flexibility, no income restriction, and unlimited deduction potential—making it ideal for businesses investing heavily in capital assets.

The optimal approach: Use both strategically—Section 179 first, then bonus depreciation—to tailor deductions to your income and long-term tax goals.

 

Need Expert Help Choosing Between Section 179 and Bonus Depreciation?

Contact us, we help business owners develop customized tax strategies that balance immediate deductions with long-term growth.

 

External References

• IRS – Section 179 Deduction
• IRS Publication 946 – How to Depreciate Property
• Internal Revenue Code §168(k) – Bonus Depreciation
• IRS – Qualified Improvement Property (QIP) Guidance
• IRS – Form 4562 Instructions