Section 179 and Bonus Depreciation

For business owners making equipment purchases in 2025, the combination of Section 179 and bonus depreciation offers one of the most powerful tax-saving strategies available. With the Section 179 deduction limit now at $1,250,000 and bonus depreciation at 40%, businesses can immediately expense significant portions of their capital investments rather than depreciating them over many years.

Recent IRS data shows that businesses utilizing both strategies saved an average of $682,500 on $3 million in equipment purchases in 2024. However, with bonus depreciation phasing down from 60% in 2024 to 40% in 2025 (and eventually to 0% by 2027), the window for maximizing these benefits is narrowing rapidly.

Strategy Overview

Section 179 and bonus depreciation work together to accelerate equipment deductions. Section 179 allows immediate expensing up to $1,250,000 for qualifying property, while bonus depreciation permits an additional 40% deduction on the remaining cost basis. This layered approach can transform the economics of capital investments, often allowing businesses to deduct 65-100% of equipment costs in the first year.

The strategy is particularly powerful because it applies to both new and used equipment, covers a wide range of business property, and can significantly improve cash flow by reducing current-year tax obligations. Smart timing and strategic planning can mean the difference between paying full price for equipment and having the government effectively subsidize 35-45% of your purchase through tax savings.

Interactive Calculator: See Your Potential Savings

Use our calculator below to see how much you could save with this strategy:

Frequently Asked Questions

What are the 2025 limits for Section 179 and bonus depreciation?

For 2025, the Section 179 deduction limit has increased to $1,250,000, up from $1,220,000 in 2024. The phase-out threshold begins at $3,130,000 in total equipment purchases, meaning the deduction reduces dollar-for-dollar above this amount. Bonus depreciation sits at 40% for 2025, continuing its scheduled phase-down from previous years.

Current Data: The 2.5% increase in Section 179 limits reflects inflation adjustments, while bonus depreciation's decline from 60% to 40% represents a 33% reduction in this benefit year-over-year (IRS Revenue Procedure 2024-40).

Key Points:

• Section 179 maximum: $1,250,000 (subject to business income limits)
• Phase-out starts at: $3,130,000 in purchases
• Bonus depreciation: 40% with no income limitation
• SUV deduction limit: $31,300 for qualifying vehicles

Example Scenarios:

• Small Business: $150,000 equipment purchase = 100% first-year deduction via Section 179
• Growing Company: $1.5M purchase = $1.25M Section 179 + $100,000 bonus depreciation
• Large Enterprise: $5M purchase = $0 Section 179 (phased out) + $2M bonus depreciation

How do I calculate the combined benefit of Section 179 and bonus depreciation?

The calculation follows a specific order to maximize deductions. First, apply Section 179 up to the lesser of $1,250,000, your business income, or the equipment cost. Then, apply 40% bonus depreciation to any remaining basis. Finally, standard MACRS depreciation applies to any amount left.

Expert Insight: "The key is understanding the stacking rules. Section 179 comes first, which is why businesses with income limitations should carefully plan their elections," notes tax strategist Michael Chen, CPA.

Implementation Steps:

1. Calculate total qualifying equipment purchases for the year
2. Determine if you're below the $3,130,000 phase-out threshold
3. Apply Section 179 deduction (limited by business income)
4. Calculate 40% bonus depreciation on remaining basis
5. Apply regular MACRS depreciation to final remainder
6. File Form 4562 with complete documentation

What property qualifies for these deductions in 2025?

Both Section 179 and bonus depreciation apply to a broad range of business property, but understanding the nuances can unlock additional savings opportunities that many businesses miss.

Comparison Table:

Advanced Techniques:

• Cost Segregation: Combine with Section 179 for building components
• Like-Kind Exchanges: Structure 1031 exchanges to maximize new basis eligibility
• Repair vs. Improvement: Strategic classification can accelerate deductions

What are the most common mistakes businesses make?

Understanding what not to do is as important as knowing the correct strategies. Recent IRS audit data reveals several recurring errors that can trigger scrutiny or result in lost deductions.

Red Flags to Avoid:

1. Missing the "Placed in Service" Deadline: Equipment must be operational by December 31, not just purchased. A $500,000 December purchase that isn't installed until January loses an entire year of deductions.
2. Exceeding Business Income Limits: Section 179 cannot create a loss. Businesses often miss that bonus depreciation has no such limitation, leading to suboptimal deduction ordering.
3. Poor Documentation: IRS requires proof of business use percentage, in-service dates, and purchase details. Missing logs can invalidate entire deductions.
4. State Conformity Assumptions: 18 states don't fully conform to federal Section 179 rules, creating unexpected tax bills.
5. Phase-Out Miscalculations: Purchases above $3,130,000 reduce Section 179 dollar-for-dollar, not proportionally.

How should I plan for the bonus depreciation phase-out?

With bonus depreciation dropping to 20% in 2026 and 0% in 2027, strategic multi-year planning becomes crucial for maximizing these vanishing benefits.

Advanced Strategies:

• Accelerate 2025 Purchases: The 40% rate in 2025 vs. 20% in 2026 means a $1 million purchase saves an extra $200,000 in deductions if timed correctly
• Equipment Lease Analysis: As bonus depreciation phases out, operating leases may provide better cash flow than purchases
• Multi-Entity Planning: Structure purchases across related entities to maximize Section 179 limits while avoiding phase-outs
• State Tax Arbitrage: Time purchases based on state conformity to federal rules
• Legislative Monitoring: Proposed bills could restore 100% bonus depreciation retroactively

Implementation Timeline

Week 1: Assessment and Planning

• Compile list of all planned equipment purchases for 2025
• Review current year business income projections
• Analyze multi-year equipment needs given phase-out schedule
• Consult with CPA on entity structure optimization

Week 2: State and Federal Analysis

• Research state conformity to federal depreciation rules
• Calculate combined federal and state tax benefits
• Identify any state-specific opportunities or limitations
• Plan for multi-state allocation if applicable

Week 3: Purchase Execution

• Finalize equipment vendor negotiations
• Ensure proper purchase documentation
• Coordinate installation for in-service requirements
• Establish business use logs and tracking systems

Week 4: Documentation and Filing

• Complete Form 4562 preparation
• Organize all supporting documentation
• Review calculations with tax professional
• File elections and maintain audit trail

Optimization Strategies

Timing Optimization

• Year-End Planning: Place equipment in service by December 31 to capture current-year deductions
• Income Matching: Time Section 179 elections to high-income years since carryforwards are limited
• Phase-Out Management: Split large purchases across tax years to stay under $3,130,000 threshold

Entity Structure Optimization

• Multiple Entities: Each business entity gets its own Section 179 limit
• Consolidated Groups: Carefully allocate purchases to maximize benefits across the group
• Pass-Through Considerations: Plan for impact on individual owner tax situations

Cash Flow Optimization

• Finance with Deductions: Deduct 100% while financing purchase over time
• Lease vs. Buy Analysis: Compare tax benefits against lease payment deductibility
• Reinvestment Strategy: Use tax savings to fund additional growth investments

Advanced Strategies

Cost Segregation Combined Strategy

Combine cost segregation studies with Section 179 for maximum building-related deductions. A cost segregation study can reclassify 20-40% of building costs as personal property eligible for accelerated depreciation. When combined with Section 179 elections on specific components, first-year deductions can exceed 50% of total building costs.

Multi-State Tax Arbitrage

With varying state conformity to federal rules, sophisticated businesses can optimize purchase locations and entity structures. For example, purchasing equipment through an entity in a fully-conforming state while using it in a non-conforming state (with proper documentation) can maximize combined benefits.

Legislative Timing Arbitrage

Monitor proposed tax legislation for potential retroactive bonus depreciation restoration. The House-passed Tax Relief for American Families and Workers Act would restore 100% bonus depreciation retroactively. Businesses prepared to act quickly when legislation passes can capture significantly higher deductions.

Ready to implement this strategy? Slim Tax can help you create a personalized implementation plan and track your progress.

Disclaimer: This strategy guide provides general tax information based on current regulations. Consult with a qualified tax professional for advice specific to your situation.