Section 179 Deduction: Limits, Vehicles, and the Income Cap
The election to expense equipment in the year you buy it — the limit, the phase-out, the vehicle rules, and when bonus depreciation is better
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Section 179 lets a business deduct the full cost of qualifying equipment, software, and certain building improvements in the year they are placed in service, instead of depreciating them over years. The deduction is capped at an annual dollar limit (US$2,560,000 for 2026, raised by the 2025 legislation), phases out above a total-purchases threshold, and cannot exceed business income.
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What qualifies for section 179?
Tangible personal property bought for use in an active trade or business: machinery, equipment, vehicles (with limits below), computers, furniture, off-the-shelf software, and — since 2018 — certain improvements to nonresidential buildings: roofs, HVAC, fire protection and alarm systems, security systems, and qualified improvement property. The property may be new or used, but must be acquired by purchase from an unrelated party and used more than 50 percent for business. Buildings themselves, land, and property held for investment or used to furnish lodging do not qualify. Property you lease to others generally does not qualify for a non-corporate lessor unless specific tests are met — the reason "section 179 lease" questions usually have the answer "no" for the lessor and "not applicable" for the lessee (a lessee does not own the equipment and cannot expense it; the lease payments are the deduction).
What are the limits?
Three limits apply in order.
| Limit | What it does | Current figure |
|---|---|---|
| Annual dollar limit | Caps the total section 179 deduction for the year | US$2,500,000 for 2025; US$2,560,000 for 2026 (raised by the 2025 legislation, then indexed) |
| Investment phase-out | Reduces the dollar limit one-for-one once total section 179 property placed in service exceeds a threshold | US$4,000,000 for 2025; US$4,090,000 for 2026 (fully phased out at US$6,500,000 and US$6,650,000) |
| Business income limitation | Deduction cannot exceed the taxpayer's aggregate net income from all active trades or businesses (including W-2 wages); excess carries forward | Computed annually |
The business income limitation is the one small businesses hit. Section 179 cannot create or increase a loss. A new business with US$200,000 of equipment and US$40,000 of first-year profit can elect section 179 on the whole US$200,000 but deducts only US$40,000 this year (or more, if the owner's W-2 wages or spouse's wages add to the income base on a joint return); the rest carries forward indefinitely. Bonus depreciation has no such limit, which is why loss-year businesses use bonus and profitable businesses use section 179 — or both.
How do the vehicle rules work?
Passenger automobiles (cars, and trucks and vans rated at 6,000 pounds gross vehicle weight or less) are subject to the annual "luxury auto" depreciation caps, which limit section 179, bonus, and regular depreciation combined to a modest first-year figure. Vehicles over 6,000 pounds GVWR are not passenger automobiles for this purpose: sport utility vehicles and similar vehicles in the 6,001–14,000 pound range get section 179 up to a specific SUV cap (US$31,300 for 2025 and US$32,000 for 2026), while cargo vans, pickups with a six-foot bed, and vehicles with no rear seating have no cap beyond the general limit. Business use must exceed 50 percent, and if it later drops to 50 percent or below, the excess deduction is recaptured.
Section 179 or bonus depreciation?
| Section 179 | Bonus depreciation | |
|---|---|---|
| Election | Asset by asset, any amount up to the limit | By class of property; all or nothing within the class (can elect out) |
| Dollar limit | Yes, indexed | None |
| Income limitation | Yes — cannot create a loss | None — can create a loss (subject to the excess business loss rules) |
| Used property | Qualifies | Qualifies (if acquired after September 27, 2017) |
| Building improvements | Roofs, HVAC, fire, security, QIP | QIP (15-year property); separately, an elective 100 percent allowance for qualified production property (manufacturing space) from 2025 |
| State conformity | Most states follow with their own limits | Many states decouple or limit |
In practice: a profitable business with modest purchases uses section 179 for the flexibility (pick the assets, pick the amount, fine-tune taxable income); a business with large purchases or a loss year uses bonus depreciation; many use section 179 first and bonus on the remainder. State treatment often decides — several states allow section 179 but not bonus, so the federal choice creates a state difference either way.
What happens on sale?
Amounts expensed under section 179 are depreciation for recapture purposes: on sale, gain up to the amount expensed is ordinary income under section 1245 (the recapture guide). And if business use falls to 50 percent or below before the end of the asset's recovery period, the section 179 deduction is recaptured in that year as ordinary income, less the depreciation that would have been allowed.
Worked example
A plumbing company with US$180,000 of profit buys a US$58,000 cargo van (over 6,000 pounds, no cap), US$22,000 of equipment, and a US$40,000 rooftop HVAC unit for its owned shop. It elects section 179 on all US$120,000: well under the annual limit, under the phase-out threshold, and under its US$180,000 business income. Taxable business income falls to US$60,000. Its competitor, a first-year startup with US$300,000 of equipment and a US$20,000 loss, gets nothing from section 179 this year (no business income to absorb it) and uses 100 percent bonus depreciation instead, producing a loss it carries under the excess business loss and net operating loss rules.
Frequently asked questions
What is the section 179 limit this year?
For tax years beginning in 2026, the limit is US$2,560,000, reduced dollar for dollar once section 179 property placed in service exceeds US$4,090,000 (US$2,500,000 and US$4,000,000 for 2025, as set by the 2025 legislation). The IRS publishes each year's indexed figures in an annual revenue procedure and in Publication 946.
Does section 179 apply to leased equipment?
Not for the lessee, who does not own the equipment and deducts the lease payments instead. A non-corporate lessor can claim section 179 only if the lease meets specific tests. A lease that is really a financed purchase (a capital lease) is treated as a purchase.
What is the business income limitation?
The section 179 deduction for the year cannot exceed the taxpayer's aggregate net income from active trades or businesses, including wages. Any disallowed amount carries forward indefinitely.
Should I use section 179 or bonus depreciation?
Section 179 when you want asset-by-asset control and have the income to absorb it; bonus depreciation when purchases are large or the year is a loss. Check your state's conformity — it often decides.
Official sources
Publication 946 states: “You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.” — Internal Revenue Service, Publication 946, How To Depreciate Property, https://www.irs.gov/publications/p946
Next step
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