Section 179 Expensing vs. Bonus Depreciation: Which Deduction Saves More Tax
Two powerful tax breaks for equipment purchases work differently—here's how to pick the right one for your business.
- Section 179 lets you deduct up to $1.16 million (2023) of equipment cost immediately; bonus depreciation writes off a percentage of cost in year one, with no dollar cap.
- Section 179 has income limits and property-use restrictions; bonus depreciation applies to most business property but phases out after 2026.
- For small purchases under the Section 179 cap, Section 179 is simpler; for large equipment or when you want maximum first-year deductions, bonus depreciation often wins.
Section 179 expensing and bonus depreciation are both ways to deduct the cost of business equipment faster than traditional depreciation allows. The key difference: Section 179 lets you deduct a set dollar amount in year one, while bonus depreciation lets you deduct a percentage of the cost in year one, with no cap. Both reduce your taxable income immediately, lowering your tax bill—but they have different rules, limits, and situations where each shines.
How Section 179 Expensing Works
Section 179 allows you to deduct the full cost of qualifying business property in the year you buy it, up to a dollar limit. For 2023, that limit is $1.16 million (adjusted annually for inflation). Once you hit that cap, you must depreciate the excess cost over time. There's also a phase-out: if you buy more than $4.6 million in property in a year, your Section 179 deduction shrinks dollar-for-dollar above that threshold.
You can elect to use Section 179 on any qualifying property—vehicles, machinery, computers, furniture—but not on real estate or land. You must also use the property more than 50% for business (not personal use). The deduction is limited to your taxable income for the year; if you can't use the full deduction because your income is too low, you can carry the excess forward to future years.
How Bonus Depreciation Works
Bonus depreciation is a percentage deduction taken in the first year of use. As of 2023, you can deduct 80% of the cost of most business property in year one; that percentage steps down by 20% each year until it reaches zero in 2027 (unless Congress extends it). Unlike Section 179, there's no dollar cap—you can deduct 80% of a $10 million equipment purchase if you want.
Bonus depreciation applies to most tangible business property—equipment, vehicles, machinery—and also to certain real property like qualified leasehold improvements. Like Section 179, it requires business use of more than 50%. The catch: bonus depreciation is automatic unless you affirmatively elect out of it on your tax return. You don't have to claim it, but if you want the deduction, you generally get it without filing an election.
Section 179 vs. Bonus Depreciation: Side-by-Side
| Feature | Section 179 | Bonus Depreciation |
|---|---|---|
| Year-one deduction | Full cost, up to $1.16M (2023) | 80% of cost (2023), no cap |
| Phase-out threshold | $4.6M in purchases (2023) | None |
| Applies to real estate | No | Yes (certain types) |
| Income limit | Limited to taxable income | Limited to taxable income |
| Expires | Permanent (but limits change) | Phases down, expires after 2026 |
| Carryforward unused deduction | Yes, to future years | Yes, to future years |
| Complexity | Requires election on tax return | Automatic (unless you opt out) |
Why and When Each One Matters
The tax savings depend on your income, your tax bracket, and the size of your purchase. If you buy $500,000 in equipment, Section 179 lets you deduct all of it (as long as you have the income to absorb it). Bonus depreciation would let you deduct $400,000 (80% of $500,000) in year one. In this scenario, Section 179 saves more tax in year one. But if you buy $2 million in equipment, Section 179 maxes out at $1.16 million, while bonus depreciation covers 80% of the full $2 million ($1.6 million). Now bonus depreciation wins.
Bonus depreciation also matters because it has no dollar cap and doesn't phase out until 2027. If you're buying heavy equipment or making a large capital investment, bonus depreciation is often the better choice. Section 179 is simpler for smaller purchases and works well if your business income is modest—you get the full deduction without worrying about phase-outs, and you can carry forward any unused amount.
- Small purchase (under $500K) with solid income? Section 179 is usually simpler and gives you the full deduction immediately.
- Large purchase (over $1.16M)? Bonus depreciation likely saves more tax because there's no cap.
- Real property (building improvements, certain leasehold property)? Only bonus depreciation applies.
- Unsure about future income? Section 179 lets you carry forward unused deductions; bonus depreciation does too, but it phases out after 2026.
- Want to spread deductions over time? You can elect out of bonus depreciation and use traditional depreciation instead—Section 179 requires an affirmative election to claim.
The Math: A Real Example
Say you buy a $1.5 million CNC machine for your manufacturing business, and your taxable income is $2 million. Using Section 179: you deduct $1.16 million (the 2023 cap), leaving $340,000 to depreciate over time. At a 25% tax bracket, that's $290,000 in year-one tax savings. Using bonus depreciation: you deduct 80% of $1.5 million, or $1.2 million. At 25%, that's $300,000 in year-one tax savings. Bonus depreciation wins by $10,000 in this case. Now add a second $1 million equipment purchase the same year: Section 179 stays at $1.16 million (you hit the cap), but bonus depreciation covers 80% of the additional $1 million ($800,000). The gap widens in favor of bonus depreciation.
Sources
- IRS Publication 946: How to Depreciate Property (2023 limits and rules)
- IRS Section 179 Property: Annual limits adjusted for inflation each year
- Tax Cuts and Jobs Act (TCJA) bonus depreciation phase-down schedule through 2027
