Section 179 Deduction Guide for Small Business: 2026 Limits, Rules & Planning

The Section 179 deduction is the most aggressive tax break in the small business toolkit. Buy a $50,000 truck on December 31, deduct the entire amount in 2025. But the rules have hard edges — get one wrong and the IRS disallows the whole thing.

2026 limits (for property placed in service in 2025)

Per Rev. Proc. 2024-40:

• Maximum deduction: $1,250,000
• Phase-out begins: $3,130,000 of qualifying purchases
• Bonus depreciation rate: 40% for 2025 (down from 60% in 2024, dropping to 20% in 2026)
• Vehicle limits (passenger autos): $20,200 first year ($28,000 with bonus); SUVs over 6,000 lbs GVW: $30,500 §179 limit

What qualifies

Per IRC § 179(d) and IRS Pub 946:

• Tangible personal property used in your trade or business — equipment, machinery, computers, off-the-shelf software, office furniture
• Listed property (cars, trucks) — must exceed 50% business use to qualify (failing the 50% test in any year triggers recapture)
• Qualified improvement property — interior, non-structural improvements to commercial buildings (HVAC, roofs, fire/alarm systems, security)
• Off-the-shelf software — not custom development

Doesn't qualify: real estate (land or buildings), inventory, intangibles, software you developed in-house, property used outside the US.

How it stacks with bonus depreciation

The order matters:

1. Apply § 179 first (capped at $1.25M and your taxable income)
2. Apply bonus depreciation (40% in 2025) on the remaining basis
3. Apply regular MACRS on whatever's left

Example: Buy a $100,000 piece of equipment, 5-year MACRS class:

Step	Calculation	Amount
§ 179 election	(election)	$100,000
Bonus dep. on remainder	$0 × 40%	$0
MACRS year 1	$0 × 20%	$0
Year 1 deduction		$100,000

Or if you skip § 179:

Step	Calculation	Amount
§ 179 election	$0	$0
Bonus dep. on remainder	$100,000 × 40%	$40,000
MACRS year 1	$60,000 × 20%	$12,000
Year 1 deduction		$52,000

The taxable income limit

§ 179 cannot create or increase a net loss. It's limited to your net business income including W-2 wages from any spouse. If your business has only $30,000 of net income, your § 179 caps at $30,000 — the excess carries forward indefinitely.

This is why some businesses prefer bonus depreciation: it CAN create a net operating loss, which carries back/forward.

Recapture — the gotcha

If business use of listed property drops below 50% before the end of the recovery period, you recapture the § 179 deduction. The recapture amount = § 179 taken − depreciation that would have been allowed under straight-line.

Recapture is reported on Form 4797 and adds to ordinary income.

When to use § 179 vs bonus

Scenario	Better choice
Profitable year, want to zero out income	§ 179
Loss year (already at $0)	Bonus (creates NOL)
Buying property worth > $1.25M	Mix: § 179 first, bonus on the rest
Listed property (vehicles) you might use < 50% later	Skip § 179 (avoid recapture risk)
State conformity matters (NY, NJ, PA decouple)	Sometimes bonus over § 179, depending on state

Filing it

Both deductions are claimed on Form 4562:

• Part I: § 179 election
• Part II: Bonus depreciation
• Part III: MACRS by recovery period

Form 4562 attaches to your main return (1040 Schedule C, 1120, 1120-S, or 1065).

How Accountaxed automates this

Accountaxed's depreciation engine prompts you when a transaction is categorized as Asset Purchase, lets you pick the IRS class + § 179 amount + bonus %, and generates the full Form 4562 schedule. The current-year deduction auto-flows to your Income Statement and the relevant tax form line (Line 14 on 1120-S, Line 13 on Schedule C, etc.).

Track depreciation now → · Pub 946 on MACRS