Key Takeaways
Section 179 allows you to deduct the full purchase price of qualifying equipment or software in the year it’s placed in service.
There’s a bonus depreciation of 40% in 2025. This reduces to 20% in 2026 and 0% thereafter.
IRS rules require that most businesses apply Section 179 first, followed by bonus depreciation.
Like many parts of the tax code, the rules around what qualifies under the Section 179 deduction can be tricky. Here’s what you need to know.
What is Section 179 Deduction?
The Section 179 deduction is a tax break. It allows small businesses to deduct the full cost of qualifying purchases made during the tax year instead of being depreciated over time. This deduction helps small businesses invest in themselves by providing an incentive to purchase equipment and/or software that can help improve business operations.
Section 179 Qualifications
To take advantage of Section 179, small businesses must meet specific qualifications:
- Must be a for-profit business
- Operate in the United States
- Qualifying items must be purchased during the tax year
- Items must be used for business purposes more than 50% of the time
- Must be put into service during the tax year
Once the equipment is in service, small businesses can deduct the full purchase price up to the maximum deduction allowed.
Which Expenses Qualify?
Many business expenses qualify under the Section 179 deduction, including:
- Machinery and equipment
- Office furniture
- Building alarm systems
- A/C units
- Computers and software
- Inventory management systems
- Certain vehicles
- Livestock
Intangible items, such as patents and copyrights, don’t qualify for the deduction. Purchases of real estate (land or buildings) are also ineligible. Items acquired from a related party (family members), as well as businesses or organizations you have a relationship with, cannot be claimed as a Section 179 deduction.
Section 179 Deduction Limitations
Although Section 179 can provide significant tax breaks for small business owners, there are limitations. The first limitation is the maximum deduction amount. For the 2025 tax year, the maximum deduction is $2,500,000. This means you can deduct up to $2,500,000 of the purchase price of qualifying equipment and/or software from your taxable income.
The second limitation is the spending cap. For the 2025 tax year, the spending cap is $6.5 million. It’s important to point out that there is a phase-out threshold of $4 million. Any eligible expenses that exceed this amount will lower your deduction amount dollar-for-dollar. For example, if you spend $5 million in eligible expenses, your Section 179 deduction drops from $2.5 million to $1.5 million. It is 0% for anyone exceeding the $6.5 million spend cap. They may, however, qualify for the bonus depreciation.
What’s The Bonus Depreciation?
Bonus depreciation is a separate tax incentive that allows businesses to immediately deduct a large percentage of the cost of qualifying assets (like equipment, machinery, computers, etc.) in the year they are placed in service, on top of or instead of Section 179. Unlike the Section 179 deduction, there is no spending cap. It can even exceed your business income, resulting in a net loss, which you can carry over into future tax years.
How It Works with Section 179
Here’s the order in which deductions are typically applied:
- Section 179 Deduction is applied first, up to the annual limit (e.g., $2.5 million in 2025).
- If the cost of the equipment exceeds the Section 179 limit or you hit the phase-out cap, you may apply bonus depreciation to the remaining cost.
- Any leftover amount can still be depreciated over the normal MACRS (Modified Accelerated Cost Recovery System) schedule.
Section 179 Deduction Quick Summary (2025)
| Limit Type | Amount | What It Means |
| Maximum Deduction | $2.5 million | The most you can deduct under Section 179 in a single tax year. |
| Phase-Out Threshold | $4 million | If total purchases exceed this, your deduction begins to reduce dollar-for-dollar. |
| Spending Cap | $6.5 million | If total purchases exceed this, you cannot claim any Section 179 deduction. |
Benefits of Section 179 For Small Business Owners
Section 179 provides many benefits for small business owners. First and foremost, the deduction can help you offset the cost of purchasing items, which can help improve business operations. By deducting the full purchase price of the equipment and/or software, you can keep more of your hard-earned money and reinvest in your business.
Second, the deduction can help you save money on your taxes. By deducting the full purchase price of the qualifying item, you can reduce your taxable income and the amount of taxes you owe.
How to Claim a Section 179 Deduction on Your Taxes
To claim a Section 179 deduction on your taxes, you must file IRS Form 4562 with your tax return. This form is used to report depreciation and amortization and includes an area for Section 179 deductions (Part I). To claim the deduction, you must list the qualifying equipment and/or software that you purchased or financed during the tax year. You must also include the deduction amount you are claiming.
Need Help?
The Section 179 deduction is a valuable tax break for small business owners that can help offset the cost of purchasing equipment and/or software. Although there are limitations to the deduction, small business owners who meet the eligibility criteria can take advantage of the deduction and save money on their taxes. To see how Section 179 can benefit your small business, contact Tax Defense Network at 855-476-6920 for a free consultation today!