US depreciation, Section 179 and bonus depreciation explained

When a US business buys equipment, it cannot simply treat the whole cost as an expense the way it would with rent or supplies — the default rule spreads that cost over years through depreciation. But two provisions, Section 179 and bonus depreciation, let a business accelerate much or all of the deduction into the year of purchase. For a profitable business, the choice between spreading and front-loading can materially change the current year's tax. This guide explains depreciation and the two acceleration mechanisms.

Why equipment is depreciated

Equipment, machinery, vehicles and similar assets are expected to be used across several years, so the default tax treatment matches the deduction to that useful life rather than allowing it all at once. This is depreciation: the cost is capitalised as an asset and deducted in portions over a recovery period, under the standard US system for doing so. The logic is that the asset earns income over years, so its cost should be recovered over those years too. Left to the default, then, a $50,000 machine does not produce a $50,000 deduction in year one — it produces a series of smaller deductions across the recovery period.

Section 179 expensing

Section 179 lets a business step outside that default. It can elect to deduct a large part or all of the cost of qualifying property in the year the asset is placed in service, rather than depreciating it over years. Key features:

• It applies to qualifying business equipment and certain other property.
• It is subject to an annual dollar limit and a phase-out once total purchases exceed a threshold.
• It is limited by business income — Section 179 generally cannot create or increase a loss.

The attraction is timing: a profitable business that buys equipment can bring the deduction forward, reducing this year's taxable income rather than waiting for it to unwind over the recovery period.

Bonus depreciation

Bonus depreciation is a second acceleration mechanism. Like Section 179, it allows a large percentage of a qualifying asset's cost to be deducted immediately in the year it is placed in service. The differences matter:

• It is not constrained by business income in the way Section 179 is, so it can contribute to a loss.
• Its percentage has changed over time under legislation, so the amount available in a given year is not fixed.

Businesses frequently consider the two together — using Section 179 for part of a purchase and bonus depreciation for the rest — to arrive at the immediate deduction they want, within the rules for the year.

Records and where it fits

Whatever method is chosen, the records required are the same: the asset's cost, its purchase date, and — critically — the date it was placed in service, since that date, not the purchase date, governs when the deduction is available. The deduction reduces business profit reported on the relevant return, such as Schedule C for a sole proprietor or an LLC treated as one under single-member LLC taxation, and it sits alongside the ordinary business expense deductions a business claims. Because it lowers net profit, it also affects the base for self-employment tax. The choice of how much to expense upfront is one of the more valuable timing decisions a profitable small business makes each year. It is worth remembering two caveats: many states do not fully conform to the federal Section 179 and bonus rules, so the state deduction can differ from the federal one; and disposing of an asset that was heavily expensed can trigger a claw-back of the earlier deduction, so the upfront benefit is not always permanent. Neither undermines the strategy, but both belong in the calculation.

Sources

This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.

• Businesses (Internal Revenue Service)

Questions people also ask