9.2 Section 179 Expensing & Bonus Depreciation Rules

Why 179 and bonus sit on top of MACRS

Once you can assign a MACRS class and convention, AIPB's tax-depreciation skill adds two overlays that can zero out remaining basis in year 1: the section 179 election and the special depreciation allowance (bonus). IRS Topic 704 states the order in one sentence: the allowance is taken after any allowable Section 179 deduction and before any other depreciation is allowed. Form 4562 follows that order: Part I (179), Part II (bonus for non-listed property), Part III (MACRS). Listed property uses Part V but the same stack.

Harbor Street HVAC's bookkeeper who books only GAAP straight-line will understate the tax deduction when the owner elects 179 or takes 100% bonus, and will overstate book-tax reconciliation if someone dumps the entire tax number into Depreciation Expense on the income statement. Keep two schedules.

What qualifies for section 179

Pub 946 chapter 2: the property must be eligible, acquired for business use, acquired by purchase, and not in the excepted list.

Eligible property includes tangible personal property (machinery, equipment, office equipment, signs, certain lodging property), off-the-shelf computer software, single-purpose agricultural or horticultural structures, and qualified section 179 real property. Qualified 179 real property is qualified improvement property plus roofs, HVAC, fire protection and alarm systems, and security systems placed in service after the nonresidential building was first placed in service.

Does not qualify: land and land improvements such as swimming pools, paved parking areas, docks, bridges, and fences; property acquired by gift or inheritance; property bought from a related person (Pub 946's tailor-and-father sewing-machine example); most property a noncorporate lessor leases to others; property used predominantly outside the United States; and property used by certain tax-exempt or governmental users.

Partial business use: you may elect 179 only if business use is more than 50% in the placed-in-service year. Multiply cost by the business-use percentage; that business cost is the 179 base. Pub 946: May Oak's $11,000 asset used 80% for business has a business cost of $8,800.

Investment-only property (pure rental of property that is not your trade or business, royalty property) does not qualify. Wages you earn as an employee do count in the taxable-income limit, but an employee's personal laptop used at home usually fails the convenience-of-the-employer test discussed in section 9.3.

2026 dollar limit, phaseout, and SUV cap

Pub 946 What's New for 2026:

The dollar limit applies to the taxpayer, not to each business. You may allocate the elected amount among qualifying assets in any way as long as the total does not exceed the limit. You do not have to elect the full maximum.

Investment phaseout. If the cost of section 179 property placed in service exceeds $4,090,000, reduce the $2,560,000 cap, not below zero, by the excess. Complete phaseout: $4,090,000 + $2,560,000 = $6,650,000. At $6,650,000 or more of 179 property, the 2026 dollar limit is $0.

SUV cap. You cannot elect to expense more than $32,000 of the cost of a heavy SUV placed in service in tax years beginning in 2026. Pub 946's vehicle definition (2025 text, with the 2026 dollar swapped in from What's New): a four-wheeled vehicle primarily designed or used to carry passengers on public streets, rated at more than 6,000 pounds and not more than 14,000 pounds gross vehicle weight. The SUV cap does not apply to a vehicle designed to seat more than nine passengers behind the driver, a vehicle with a cargo area at least six feet in interior length not readily accessible from the passenger compartment, or a vehicle with an integral enclosure, no seating rearward of the driver, and no body section protruding more than 30 inches ahead of the windshield (typical cargo van / work truck).

Taxable-income limit. After the dollar limit, 179 cannot exceed taxable income from the active conduct of any trade or business. Figure that income without the 179 deduction itself, the SE-tax deduction, NOL carrybacks or carryforwards, and unreimbursed employee business expenses. Wages count. Disallowed 179 because of this limit carries forward; Pub 946 puts the carryover on Form 4562 line 13 and brings it back on line 10 next year. Earliest-year carryovers are used first. If you dispose of the property before using the carryover, add the unused amount back to basis; the buyer does not inherit it.

Trap: treating 179 as creating a net operating loss. The income limit stops 179 from going below zero taxable income from the businesses you actively conduct. Bonus is different: it is not limited by that 179 income cap and can create or increase an NOL.

Bonus (special depreciation allowance) percentages

Topic 704 (page last reviewed February 18, 2026):

Pub 946 chapter 3 matches those dates. For calendar-year 2026 acquisitions that are also placed in service in 2026, both tests (acquired after January 19, 2025 and placed in service after that date) are met, so 100% applies unless the taxpayer elects out.

Qualified bonus property generally includes MACRS property with a recovery period of 20 years or less, certain computer software, water utility property, and certain film, television, theatrical, and sound-recording productions. New or certain used property can qualify. ADS-required property (including listed property used 50% or less in qualified business use) does not qualify. Property placed in service and disposed of in the same year does not qualify.

Bonus is the default. You must elect out, generally by property class, on a timely filed return. Pub 946 also allows, for the first tax year ending after January 19, 2025, an election to take 40% (60% LPPP/certain aircraft) instead of 100%. That is an elective slowdown, not the 2026 default.

Topic 704 also notes an elective 100% allowance for qualified production property (section 168(n)) when construction begins after January 19, 2025 and the property is placed in service after July 4, 2025. Recapture can apply if the manufacturing use stops within 10 years (Notice 2026-16). Harbor Street's ordinary tools and vans are 168(k) problems, not 168(n) factories.

Stacking: 179, then bonus, then MACRS

Pub 946's MACRS worksheet is the algorithm:

1. Cost × business-use percentage.
2. Subtract section 179 elected (and other specified basis reductions).
3. Multiply the remainder by the bonus percentage. That product is the special depreciation allowance.
4. Remaining basis × the MACRS table rate for the class and convention.

If 179 plus 100% bonus consume the entire business basis, MACRS is zero and you still report the asset so the IRS can see the elections.

Worked 2026 section 179 phaseout

Facts. In 2026 Harbor Street's related equipment dealer (calendar-year) places $4,290,000 of qualifying section 179 machinery in service. Taxable income from the active business, computed without 179, is $3,000,000. No SUVs.

Step 1 — excess cost. $4,290,000 − $4,090,000 = $200,000.

Step 2 — reduced dollar limit. $2,560,000 − $200,000 = $2,360,000.

Step 3 — income limit. $2,360,000 is below $3,000,000 of taxable income, so the income limit does not cut further.

Result. Maximum 179 deduction = $2,360,000. Remaining cost of $1,930,000 ($4,290,000 − $2,360,000) is still depreciable. If the machinery was acquired and placed in service in 2026, 100% bonus takes the remaining $1,930,000 unless the taxpayer elects out. MACRS remaining basis = $0. Year-1 cost recovery can be the entire $4,290,000 when both 179 and 100% bonus apply and income is sufficient.

Same facts except cost is $6,650,000. Excess = $6,650,000 − $4,090,000 = $2,560,000. Dollar limit = $2,560,000 − $2,560,000 = $0. No 179. Remaining basis $6,650,000 still faces 100% bonus if qualified, so year 1 can still be a full write-off without 179. Phaseout kills 179; it does not automatically kill bonus.

Income-limit variant. Elect $2,360,000 of 179 but taxable income from active businesses is only $800,000. Current-year 179 deduction = $800,000. Carryover = $1,560,000. Bonus and MACRS still apply to basis not reduced by the 179 you attach to specific assets; track the election, the carryover, and each asset's remaining basis in the tax fixed-asset file—not in your head.

Worked 100% bonus after a smaller 179 election

Harbor Street, calendar year 2026, buys and places in service on March 3, 2026 a $180,000 pipe-threading and recovery system. It is 5-year MACRS equipment, 100% business, purchased from an unrelated dealer, and not listed property. Active-business taxable income is $400,000. The owner elects $50,000 of section 179 on this asset and does not elect out of bonus.

If instead the owner elects out of bonus and takes no 179, year-1 MACRS under half-year Table A-1 is $180,000 × 20.00% = $36,000. That $144,000 difference is why CB candidates must read the elections, not just the class life.

40% window (date trap). A compressor placed in service on January 10, 2025 (after December 31, 2024 and before January 20, 2025) takes 40% bonus, not 100%, even if you are finishing the depreciation schedule during 2026 study. Long-production-period property and certain aircraft in that window use 60%. Do not apply the January 10, 2025 40% rate to a March 2026 placement.

Book versus tax when 179 or bonus is used

GAAP (ASC 360) does not have section 179 or bonus. Harbor Street's $180,000 machine might be capitalized and depreciated straight-line over 10 years on the books ($18,000 per full year, no salvage). Tax year 1 is $180,000. Book basis at year-end is about $162,000; tax basis is $0. The $162,000 gap is a taxable temporary difference (future book depreciation with no remaining tax depreciation). Many small firms never book deferred tax; the bookkeeper still must not force the tax $180,000 through the GAAP income statement if the financials are supposed to follow GAAP. Two registers, one asset tag.

Exam traps

1. Using 2025's $2,500,000 / $4,000,000 / $31,300 figures on a 2026 return. 2026 is $2,560,000 / $4,090,000 / $32,000.
2. Reversing the stack (MACRS first, then 179). Topic 704: 179, then bonus, then other depreciation.
3. Applying 179 to a parking lot or to land. Land improvements are not 179 property.
4. Forgetting the SUV $32,000 cap on a 7,000-pound passenger SUV while correctly skipping §280F luxury-auto caps because GVWR is over 6,000 pounds.
5. Treating bonus as optional silence. Bonus is on unless you elect out by class.
6. Letting 179 create an NOL. Income limit; carry over the rest.
7. Related-party purchases. Father-to-child equipment fails the purchase test.
8. Claiming 179 on 40% business-use equipment. Need more than 50% business use.

Section 9.3 adds the vehicle overlay: listed-property business-use tests, §280F passenger-auto caps from Rev. Proc. 2026-15, the $32,000 SUV 179 cap, and the 2026 standard mileage rates.