Bonus Depreciation and Section 179: Maximizing First-Year Asset Write-Offs
Why First-Year Write-Offs Matter, Bonus Depreciation: Phase-Down Schedule, and Section 179: Expensing Election
Two provisions allow a business to write off the cost of an asset far faster than its useful life would suggest, and they are frequently used together without anybody checking whether that is the best outcome.
Accelerating a deduction is only valuable if there is income for it to reduce. Taken in a year with little profit it can be wasted, and several states do not follow the federal treatment at all, which creates a difference that has to be tracked for the life of the asset.
This covers how each provision works, the restrictions on the elective one, how the two combine, how improvements to property are treated, and the separate limits that apply to vehicles.
Why First-Year Write-Offs Matter
When a business buys equipment, machinery, or other assets, the general rule is to depreciate the cost over its useful life (5, 7, or 15 years depending on the asset class). Bonus depreciation and Section 179 both allow businesses to write off a larger portion, or all, of an asset's cost in year one, creating a larger deduction earlier and reducing current-year tax bills.
Taking the largest possible write-off in year one is treated as automatic, and it frequently is not the best answer. Accelerating a deduction into a year with little income can waste it. Ask which year the deduction is worth most in, then check whether the states you file in follow the federal treatment at all.
Anu Gupta, CA, EA, B.Tech · LinkedInBonus Depreciation: Phase-Down Schedule
The Tax Cuts and Jobs Act (TCJA) introduced 100% bonus depreciation for property placed in service after September 27, 2017. The bonus rate has been phasing down since then:
| Tax Year | Bonus Depreciation Rate |
|---|---|
| 2017 (pre-TCJA) | 50% |
| 2018-2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 onward (if no extension) | 0% |
- Applies to both NEW and USED property (used property must be new to the taxpayer)
- No taxable income limitation, bonus depreciation can create a tax loss
- Applies to: machinery, equipment, computers, furniture, qualified improvement property (QIP), and more
- Does NOT apply to: buildings or most structural components (land never depreciable)
Section 179: Expensing Election
Section 179 allows businesses to immediately expense (deduct) the full cost of qualifying property in the year it is placed in service, up to specified limits:
| Item | 2025 Amount |
|---|---|
| Section 179 deduction limit | $1,160,000 |
| Phase-out threshold | $2,890,000 of total property placed in service |
| Phase-out rate | $1 reduction in limit per $1 of property cost above threshold |
Section 179: Key Restrictions
- 179 deduction is LIMITED to business taxable income, it cannot create a net operating loss
- Any 179 deduction disallowed by the income limit carries forward to future years
- Cannot be used by trusts or estates
- Applies to: machinery, equipment, computers, furniture, off-the-shelf software, qualified improvement property
- Vehicle limits: special rules apply to luxury automobiles and SUVs over 6,000 lbs GVWR (179 on SUVs capped at $28,900 in 2025)
Combined Strategy: Use Both
The optimal strategy often combines both tools:
- Use Section 179 first on assets where you have sufficient taxable income
- Then apply bonus depreciation to remaining cost basis (and to assets over the 179 income limit)
- This maximizes first-year deductions while staying within income limitations
- Example: $500,000 of equipment, taxable income before depreciation = $200,000. Use $200,000 of 179 to eliminate all taxable income. Apply 40% bonus depreciation to remaining $300,000 cost = $120,000 bonus deduction, creating a $120,000 loss that carries forward as an NOL.
Pro Tip: Consult your tax advisor before year-end on asset purchases. Placing an asset 'in service' (ready and available for use) before December 31 is required to claim depreciation for that tax year. Buying in December and not yet using the equipment may or may not qualify.
Qualified Improvement Property (QIP)
QIP, interior improvements to nonresidential buildings placed in service after the building was originally placed in service, qualifies for bonus depreciation (15-year life under TCJA fix):
- Restaurant fit-outs, office renovations, retail improvements
- Must be to the interior of a nonresidential building
- Excludes: building envelope (roof, HVAC, fire protection, alarm, security), those are 39-year property
Luxury Auto Limits
For passenger automobiles placed in service in 2025, the maximum depreciation deductions are limited regardless of bonus depreciation or 179:
| Year of Service | Maximum Deduction (2025) |
|---|---|
| Year 1 (with bonus) | ~$20,200 |
| Year 1 (without bonus) | ~$12,200 |
| Year 2 | ~$19,500 |
| Year 3 | ~$11,700 |
| Year 4 and beyond | ~$6,960 per year |
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Frequently Asked Questions
Can I use bonus depreciation on used equipment?
Yes, post-TCJA, bonus depreciation applies to used property that is new to the taxpayer. The equipment cannot have been previously used by the taxpayer or a predecessor.
Does bonus depreciation affect my state taxes?
Many states do not conform to federal bonus depreciation rules. California, for example, does not allow bonus depreciation at the state level (limited Section 179). This means you may have different depreciation schedules for federal vs state taxes.
What happens if I dispose of the property early?
Depreciation recapture: if you sell or dispose of property on which you claimed bonus depreciation or Section 179, you may owe ordinary income tax on the recaptured depreciation (Section 1245 recapture for personal property).
Is taking the largest write-off in year one always the right choice?
No, and treating it as automatic is a common and expensive habit. Accelerating a deduction into a year with little income can waste it, while spreading it may match it against profits that are actually there. Where losses, other reliefs or a planned sale are in the picture, the arithmetic can point the other way. The right question is which year the deduction is worth most in, not how much can be taken now.
Do the states follow the federal treatment?
Not uniformly, and this is where the planning most often goes wrong. Several states decouple from the federal provisions, in whole or in part, which means an asset written off quickly for federal purposes may be written off slowly for state purposes. That produces a difference which has to be tracked for the life of the asset. Check the position for each state you file in before the election, not afterwards.
Written by
Anu Gupta, CA, EA, B.Tech
Anu works with US businesses on tax and entity questions at Profitjets, from choosing a structure to the filings that follow it. She writes about the decisions owners make once and then live with for years. Connect on LinkedIn
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