13.2 Section 179 and Bonus Depreciation

13.2 Section 179 and Bonus Depreciation

REG Area III, Group B also asks you to determine property eligible for a special depreciation allowance (bonus depreciation) or a Section 179 deduction. MACRS in Section 13.1 is what remains after those two first-year provisions. The order is mandatory: §179 (elective), then §168(k) bonus, then regular MACRS on whatever basis is left.

Order of cost recovery

Depreciable basis from Chapter 11 is the starting number. Apply amounts in this sequence:

1. Elect a §179 deduction for that asset, subject to the dollar cap, the investment phaseout, and the taxable-income limit.
2. Apply §168(k) additional first-year depreciation (bonus) to remaining adjusted basis, unless the taxpayer elects out of bonus for that class.
3. Run regular MACRS from Section 13.1 on any basis still remaining, using the class and convention already determined.

Bonus is the default for qualified property; the taxpayer must elect out by class to skip it. Section 179 is the opposite: nothing is expensed under §179 unless the taxpayer elects in, asset by asset. On a REG stem, do not apply MACRS to the full cost of qualified property acquired and placed in service after January 19, 2025 unless the facts say the taxpayer elected out of bonus and did not elect §179.

Section 179 — mechanics, not indexed dollars

IRC §179 lets a taxpayer elect to treat the cost of qualifying property as an expense in the year the property is placed in service. Qualifying property is tangible personal property (and off-the-shelf computer software) acquired by purchase for use in the active conduct of a trade or business, plus certain qualified real property improvements — qualified improvement property and specified nonresidential building systems (roof, HVAC, fire protection, and security). Land, a new 39-year office building, and most structural components that are not QIP or specified systems do not qualify.

Two statutory ceilings, not a REG memorization of this year’s inflation print, control the election:

• A dollar cap on the §179 deduction for the year.
• An investment phaseout: the cap is reduced dollar-for-dollar by the amount of qualifying property placed in service for the year that exceeds a threshold.

The One Big Beautiful Bill Act (signed July 4, 2025) raised the statutory cap to $2.5 million and the phaseout threshold to $4 million for taxable years beginning after 2024. Those figures are then inflation-adjusted; a 2026 illustration is about $2.56 million of cap. The AICPA’s REG assumption is that candidates are not tested on specific inflation-indexed dollar amounts. Teach the mechanics: once qualifying purchases pass the threshold, every extra dollar of qualifying property reduces the cap by a dollar, and the deduction is gone when purchases reach cap plus threshold (statutorily $6.5 million before inflation). Do not memorize the 2026 print as a REG number.

A third limit is not a dollar print at all: the §179 deduction cannot exceed taxable income derived from the active conduct of any trade or business. Section 179 will not create or increase a loss. Any elected amount that is blocked by the taxable-income limit carries forward. Wages as an employee are treated as taxable income from a trade or business for this limit, which is why an employee with a side business can still have room for §179.

Passenger automobiles are listed property and are further limited by the §280F annual dollar caps. Sport-utility vehicles above the 6,000-pound gross-vehicle-weight threshold generally escape those luxury-auto caps, but §179 then imposes a separate SUV limit that is also inflation-indexed. REG tests the existence of the limit and the listed-property overlay, not the printed dollar.

Bonus depreciation after OBBBA

IRC §168(k) provides additional first-year depreciation on qualified property. The One Big Beautiful Bill Act permanently restores 100 percent additional first-year depreciation for qualified property acquired and placed in service after January 19, 2025. Both conditions must be met. Property subject to a written binding contract entered into before January 20, 2025 is treated as acquired before that date. For 2025 property that does not meet the after-January-19 tests, the Tax Cuts and Jobs Act phase-down still supplies 40 percent bonus.

Qualified property, at REG depth, is MACRS property with a recovery period of 20 years or less, off-the-shelf computer software, and qualified improvement property. New and used property can qualify, so a purchased used machine is not barred from bonus merely because it had a prior user. Residential rental (27.5-year) and nonresidential (39-year) buildings are not qualified property. QIP is the interior-improvement exception that keeps some work on a 39-year building inside the bonus net.

Bonus has no dollar cap and no taxable-income limit. It can create or increase a loss. The taxpayer may elect out of bonus for any class of property placed in service during the year; the election is all-or-nothing for that class.

Worked: $100,000 of 7-year equipment after January 19, 2025

Facts. Calendar-year taxpayer. On March 3, 2026, the taxpayer acquires and places in service $100,000 of 7-year manufacturing equipment (new or used). Qualifying §179 purchases for the year are well below the phaseout. Taxable income from the active trade or business before §179 is $250,000. No other personal property is placed in service, so half-year applies. The equipment is not listed property.

All three paths are legally available. They are not interchangeable in every fact pattern. Section 179 is limited by taxable income and by the dollar cap, and it is limited further for SUVs and passenger automobiles; bonus is not limited by those dollar and income ceilings but is an all-or-nothing class election. If the same $100,000 of equipment had been acquired under a binding contract dated January 10, 2025 and placed in service in March 2025, 100 percent bonus would not apply; the 40 percent TCJA rate would, leaving $60,000 of basis for regular MACRS unless §179 is elected against that remaining or original basis.

State decoupling is a planning overlay, not a REG computation: some states follow §179 but not bonus. Federal REG items ask which federal provision the property is eligible for, then how much federal cost recovery results after the stated elections.

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