Business equipment depreciation: Section 179 and bonus depreciation
Key takeaways
04 · ideas- Section 179 allows immediate expensing of up to $1.16M of equipment (2023)
- Bonus depreciation: phases down annually — check current IRS rules
- A $50,000 equipment purchase can generate $17,500 in immediate tax savings
- The timing of the deduction creates real cash flow value
Basic level
The essentials · 1 min
When a business buys equipment — computers, machinery, vehicles — the IRS normally requires spreading the deduction over 5–7 years (depreciation). Two special rules let businesses deduct more in year one:
Section 179: Immediately expense equipment purchases up to $1,160,000 (2023 limit). No waiting — the full cost is deductible in year one.
Bonus Depreciation: An additional immediate deduction on top of regular depreciation. This percentage phases down each year (was 100% in 2022–2023). Check the current IRS rate before planning.
Why this matters: A $100,000 piece of equipment:- Normal depreciation: ~$14,000 deduction/year for 7 years
- Section 179: $100,000 deduction in year 1
At a 25% tax rate, Section 179 saves $25,000 in taxes immediately vs. $3,500/year over 7 years. The present value of the immediate deduction is worth roughly 50% more than the spread-out deduction.
Intermediate level
How it applies · 1 min
Section 179 rules and limits
2023 limits:- Maximum deduction: $1,160,000
- Phase-out: above $2,890,000 of total purchases, dollar-for-dollar reduction
- Can't exceed business taxable income (prevents Section 179 creating a loss)
Eligible property: Most tangible personal property used in business (equipment, vehicles, computers, software). Off-the-shelf software. Some building improvements.
Not eligible: Buildings themselves (though components may qualify), property held for investment, property acquired from related parties.
Vehicle limitations
The IRS imposes "luxury auto" limits on vehicles used in business. For passenger vehicles in 2023:- Year 1 max (with bonus): $20,200
- Year 2: $19,500
- Year 3: $11,700
- Years 4+: $6,960/year
To avoid these limits: SUVs over 6,000 lbs GVWR can use Section 179 up to $28,900 (2023). Heavy trucks and commercial vehicles have no limits.
This is why "I bought an SUV for my business" is such a common tax move — heavy vehicles escape passenger vehicle limits entirely.
The bonus depreciation phase-down
| Year | Bonus depreciation % |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| Current year | See IRS update |
| 2025 | 40% |
| 2026 | 20% |
| 2027+ | 0% |
This creates a clear incentive to accelerate equipment purchases before the bonus disappears (unless Congress extends it, which it often does).
Advanced level
The math, step by step · 1 min
The time value of tax deductions
Accelerating depreciation creates real economic value through the time value of deferred taxes — paid in the future are worth less than taxes saved today.
NPV of Section 179 vs. MACRS depreciation for a $100,000 asset at 25% tax rate, 8% discount rate:
MACRS 5-year (200% DB):
Year deductions: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76%
Tax savings: $5,000, $8,000, $4,800, $2,880, $2,880, $1,440
NPV: $5,000 + $8,000/1.08 + $4,800/1.17 + ... = $20,426
Section 179 (immediate):
Tax savings: $25,000 in year 1
NPV: $25,000
Value created by acceleration: $25,000 − $20,426 = $4,574 (18% bonus)
This seems modest — but for large equipment-heavy businesses, accelerating millions in depreciation creates hundreds of thousands in NPV value annually.
The QBI interaction: Section 199A Qualified Business Income deduction allows pass-through businesses to deduct 20% of qualified income. Section 179 reduces QBI — potentially reducing the 199A deduction. For high-income business owners, the interaction can make Section 179 less valuable than it appears. The optimal strategy depends on total income, qualified property, and W-2 wages paid.