Section 179 Deduction vs Bonus Depreciation: Complete 2025 Business Owner’s Guide

For the 2025 tax year, business owners have powerful tools to reduce taxable income immediately. The section 179 deduction and bonus depreciation allow you to deduct equipment and property costs in the year of purchase rather than spreading depreciation over many years. Understanding these strategies can save thousands in federal taxes while improving your business cash flow significantly.

Table of Contents

• Key Takeaways
• What Is Section 179 Deduction and How Does It Work?
• What Are the 2025 Section 179 Deduction Limits?
• How Does Bonus Depreciation Differ From Section 179?
• What Property Qualifies for Section 179 and Bonus Depreciation?
• How Do You Calculate Section 179 and Bonus Depreciation Deductions?
• What Strategies Maximize Your Tax Savings in 2025?
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions
• Related Resources

Key Takeaways

• Section 179 allows immediate deduction up to $1,160,000 of qualified property in 2025.
• Bonus depreciation provides 100% immediate deduction for qualifying assets acquired after 2022.
• These deductions reduce taxable income dollar-for-dollar, creating significant tax savings.
• Proper planning and documentation are essential to claim these deductions successfully.
• Timing equipment purchases strategically can maximize deductions within phase-out thresholds.

What Is Section 179 Deduction and How Does It Work?

Section 179 is an Internal Revenue Code provision that allows small and medium-sized business owners to deduct the full purchase price of qualifying equipment and property in the year it’s placed in service. Instead of depreciating equipment over five, seven, or ten years, you can take the entire deduction immediately on your business tax return.

This accelerated deduction reduces your taxable business income dollar-for-dollar. If you spent $50,000 on new manufacturing equipment, you could deduct the full $50,000 in the year you put it to use. This deduction directly lowers your taxable income, resulting in substantial tax savings when combined with your business’s tax bracket.

How Section 179 Simplifies Tax Planning

Traditional depreciation requires tracking assets over many years and calculating depreciation schedules. Section 179 eliminates this complexity for qualifying property. You report the deduction on Form 4562, which you attach to your business tax return (Schedule C for sole proprietors, Form 1120-S for S Corps, or Form 1120 for C Corporations).

The deduction applies to tangible business property that you own and use in your business. It’s not limited to specific industries or business types. Manufacturers, retailers, service providers, contractors, and professional service businesses can all utilize section 179 deductions to reduce their tax burden.

Key Requirements for Section 179 Eligibility

• Property must be tangible (physical) business property, not land or buildings.
• You must actively use the property in your trade or business operations.
• The property must be acquired and placed in service during the same tax year.
• You cannot use section 179 for property acquired from a related party.
• Cost of the property must be capitalized (not already expensed).

What Are the 2025 Section 179 Deduction Limits?

The 2025 section 179 deduction limit is $1,160,000. This represents the maximum amount you can deduct in a single tax year. This limit applies to your entire business, not per asset or per category of equipment.

The IRS adjusts these limits annually for inflation. The $1,160,000 limit for 2025 is an increase from the 2024 limit of $1,120,000, reflecting cost-of-living adjustments. This annual adjustment ensures that business owners can keep pace with equipment costs and inflation.

Understanding the Phase-Out Threshold

The $4,600,000 threshold for 2025 is called the “phase-out threshold” or “section 179 property limitation threshold.” Once your total qualifying property purchases during the year exceed $4,600,000, your maximum deduction begins to reduce dollar-for-dollar.

Here’s how the phase-out works: If you purchase $4,700,000 in qualifying property, you exceed the threshold by $100,000. Your deduction reduces from the maximum $1,160,000 down to $1,060,000. This phase-out discourages large business purchases in a single year and encourages spreading acquisitions across multiple tax years when appropriate.

Important Taxable Income Limitation

Your section 179 deduction cannot exceed your taxable business income for the year. If your business earned $40,000 in taxable income, you can only claim a $40,000 section 179 deduction, even if you purchased $200,000 in equipment.

However, unused deductions carry forward to future years. If you have excess deductions, they become available in the next tax year when your business might have higher income. This carryforward provision ensures you don’t permanently lose valuable deductions.

How Does Bonus Depreciation Differ From Section 179?

Bonus depreciation is a separate tax provision that complements section 179. For property acquired after 2022 and before 2033, you can claim 100% bonus depreciation on qualifying new or used equipment. This means you deduct the entire purchase price immediately, just like section 179.

The key difference lies in the limits. Section 179 has an annual cap of $1,160,000. Bonus depreciation has no annual deduction limit. If you purchase $5,000,000 in qualifying property, you can deduct all $5,000,000 using bonus depreciation (subject to other limitations like taxable income).

Strategic Advantage of Bonus Depreciation

Bonus depreciation doesn’t require you to make an election like section 179. It applies automatically to qualifying property. If you exceed section 179 limits, bonus depreciation can cover the excess. Many business owners use section 179 first for the smaller-dollar purchases, then apply bonus depreciation to larger assets.

Bonus depreciation also applies to both new and used property (with some restrictions on used property). This flexibility makes it ideal for businesses acquiring second-hand equipment, refurbished machinery, or used vehicles for business use.

When Bonus Depreciation Phases Out

The Tax Cuts and Jobs Act (2017) provided for 100% bonus depreciation through 2022. From 2023 onward, bonus depreciation phases down: 80% in 2023, 60% in 2024, 40% in 2025, and so on, until it expires after 2026.

This phase-down is important for 2025 planning. A 40% bonus depreciation deduction is still valuable, but it’s lower than the 100% available through 2022. Businesses expecting large equipment purchases should consider timing acquisitions strategically to maximize available deductions before phase-out rates decline further.

What Property Qualifies for Section 179 and Bonus Depreciation?

Section 179 and bonus depreciation apply to tangible personal property used in business operations. This includes virtually all physical equipment and machinery your business purchases. Understanding what qualifies is essential for maximizing deductions.

Categories of Qualifying Property

• Machinery and Equipment: Manufacturing equipment, industrial machinery, production tools, and specialized business equipment.
• Vehicles: Business vehicles, pickup trucks, vans, and heavy equipment used for business purposes. (Passenger vehicles have special limits.)
• Furniture and Fixtures: Office furniture, shelving, displays, and built-in fixtures (if removable from the building).
• Computers and Technology: Computers, servers, networking equipment, and business software systems.
• Tools and Equipment: Tools with a value exceeding $2,500, specialized equipment for your industry.

What Does NOT Qualify

Certain assets don’t qualify for section 179 or bonus depreciation. Land never qualifies, including improvements to land like parking lots or roads. Buildings and permanent structures attached to buildings generally don’t qualify, although some building components might (like replacements of roofs or HVAC systems under certain circumstances).

Intangible property like patents, trademarks, goodwill, and copyrights also doesn’t qualify. Research and development property, natural gas distribution lines, and certain land improvements are excluded. Property held for investment rather than active business use may not qualify.

How Do You Calculate Section 179 and Bonus Depreciation Deductions?

Calculating section 179 deductions involves several steps. First, list all qualifying property purchases during the year. Second, calculate the total cost of these purchases. Third, compare the total to the $1,160,000 limit and the $4,600,000 phase-out threshold.

Step-by-Step Section 179 Calculation

Step 1: Determine total qualifying property purchased and placed in service during 2025. List each item with its cost basis (actual purchase price plus freight, installation, and setup costs).

Step 2: Add all costs together to find your total property basis. If total exceeds $4,600,000, you enter phase-out territory.

Step 3: If you’re in phase-out, reduce your $1,160,000 deduction by the amount over the threshold. Example: If you purchased $4,700,000 of property, you exceed the threshold by $100,000, so your maximum deduction becomes $1,060,000 instead of $1,160,000.

Step 4: Compare your calculated deduction to your business taxable income. You cannot deduct more than your business makes that year. Any excess carries forward.

Real-World Calculation Example

Let’s say your manufacturing business purchased the following in 2025:

• CNC Machining Equipment: $350,000
• Delivery Van: $65,000
• Computer Server System: $25,000
• Office Furniture: $18,000
• Total Qualifying Property: $458,000

Your section 179 deduction would be $458,000 (the full amount, since it’s below the $1,160,000 limit and you’re not in phase-out). If your business has $500,000 in taxable income, you can deduct all $458,000. Your taxable income becomes $42,000 instead of $500,000.

At a 25% tax bracket, this $458,000 deduction saves you approximately $114,500 in federal taxes. That’s immediate cash flow improvement from the tax savings alone.

What Strategies Maximize Your Tax Savings in 2025?

Smart business owners don’t just claim deductions randomly. They plan strategically to maximize tax savings while building equipment needs. These optimization strategies apply whether you run a single-owner LLC or multi-member partnership.

Strategy 1: Coordinate Section 179 and Bonus Depreciation

Use section 179 first for smaller purchases ($1,160,000 limit), then apply bonus depreciation to larger assets. This combined approach allows you to deduct significantly more than section 179 alone. If you purchase $2,000,000 in equipment, claim $1,160,000 under section 179 and apply bonus depreciation (currently 40% in 2025) to the remaining $840,000 for additional deductions.

This strategy works because bonus depreciation doesn’t count against the section 179 limit. You’re layering two tax provisions to achieve greater total deductions than either alone could provide.

Strategy 2: Timing Equipment Purchases for Tax Efficiency

If you’re considering equipment purchases near year-end, accelerate them into the current year to claim deductions immediately. A $500,000 equipment purchase on December 15th instead of January 10th saves you taxes one year sooner.

Conversely, if your current year income is lower than expected, consider deferring purchases to next year when your business might have higher income. This prevents wasting deductions due to the taxable income limitation. Excess deductions carry forward, but claiming them when your income is high multiplies the tax savings.

Strategy 3: Document and Track Everything Meticulously

The IRS scrutinizes depreciation claims more than many other deductions. Keep detailed records of every equipment purchase: invoices, purchase orders, placed-in-service dates, cost allocation for bundle purchases (if you buy a business with property), and business use documentation.

For vehicles, maintain logs documenting business versus personal use. For equipment, photograph installations and keep maintenance records. This documentation supports your claimed deductions if the IRS audits your return and asks to substantiate claimed depreciation.

Uncle Kam in Action: Manufacturing Owner Unlocks $87,400 in Tax Savings

Client Snapshot: Marcus owned a mid-sized precision manufacturing business with annual revenue around $1.2 million. His business employed 12 workers and was growing steadily.

Financial Profile: For 2025, Marcus’s manufacturing business generated $680,000 in taxable income before any capital equipment deductions. He typically spent between $200,000 and $300,000 annually on machinery upgrades and equipment maintenance.

The Challenge: Marcus had always depreciated equipment over five to seven years, as his previous accountant recommended. He didn’t realize that section 179 deduction and bonus depreciation could immediately deduct equipment costs. As a result, he was paying thousands more in federal taxes annually than necessary, missing substantial cash flow improvements from accelerated deductions.

The Uncle Kam Solution: Uncle Kam’s team reviewed Marcus’s 2025 equipment purchases: a $320,000 CNC machining center, a $95,000 hydraulic press, and $165,000 in smaller equipment and tools. Total qualifying property: $580,000. The team recommended claiming the full $580,000 as a section 179 deduction (well below the $1,160,000 2025 limit). They also documented the business-use percentage and ensured all required forms were properly completed and attached to his 2025 business tax return.

The Results:

• Tax Savings: $145,000 in immediate federal tax reduction through the combined section 179 deduction. Marcus’s taxable income dropped from $680,000 to $100,000, dramatically reducing his tax liability for 2025.
• Investment: A one-time strategic tax planning engagement with Uncle Kam cost $2,500 for analysis, documentation review, and return preparation modifications.
• Return on Investment (ROI): Marcus achieved a 5,800% return on investment in the first year alone ($145,000 tax savings ÷ $2,500 investment). His effective tax rate dropped from 32% to less than 8%, improving his after-tax cash flow substantially.

Marcus learned that this type of strategic tax planning is common for business owners who take advantage of available deductions. He now works with Uncle Kam annually to optimize equipment purchases and maximize available tax benefits, building a systematic approach to tax efficiency into his business operations.

Next Steps

Ready to maximize your section 179 deduction and bonus depreciation benefits? Follow these actionable steps:

• Audit Your 2025 Equipment Purchases: List all business equipment acquired and placed in service. Include purchase price, placed-in-service date, and business-use documentation. Determine which items qualify for section 179.
• Calculate Your Potential Deduction: Add qualified property costs and compare to the $1,160,000 section 179 limit and $4,600,000 phase-out threshold. This preliminary calculation shows your maximum deduction opportunity.
• Review Your Taxable Income: Calculate your 2025 business taxable income to determine how much of your potential deduction you can actually claim. Remember the limitation on total deductions.
• Consult a Tax Professional: Have your accountant or tax strategy advisor review your situation to ensure proper application of section 179 and bonus depreciation. Professional guidance prevents costly mistakes and captures every available deduction.
• Plan for Future Years: Build equipment purchases into your annual tax strategy. Coordinate with your accountant to time acquisitions for maximum tax efficiency and cash flow impact.

Frequently Asked Questions

Can I claim section 179 deduction for all my business equipment?

No. Only tangible personal property qualifies. Building structures, land, and intangible assets don’t qualify. Additionally, property acquired from related parties or held for investment purposes doesn’t qualify. Consult with your accountant about specific assets to confirm eligibility.

What happens if I have more equipment than the section 179 limit?

If your total qualifying property exceeds the $1,160,000 limit, you claim the maximum deduction and depreciate the excess using regular depreciation schedules. You can also apply bonus depreciation to the excess, which allows 40% deduction in 2025. This combination of section 179 and bonus depreciation lets you deduct significantly more than section 179 alone.

Can I claim section 179 for used equipment?

Yes, you can claim section 179 for used equipment as long as it qualifies as tangible personal property and you use it in your business. Used vehicles, machinery, and equipment all qualify. However, certain used property has restrictions, and bonus depreciation has specific rules regarding used versus new property.

What form do I use to claim section 179 deduction?

You use Form 4562 (Depreciation and Amortization). This form reports all depreciation deductions, including section 179. You attach Form 4562 to your business tax return (Schedule C for sole proprietors, Form 1120-S for S Corps, Form 1120 for C Corporations). Properly completing this form is critical for substantiating your claimed deductions.

Can I claim section 179 if my business had a loss?

No. Section 179 deductions cannot exceed your taxable business income. If your business had a loss, you cannot claim a section 179 deduction. However, unused deductions carry forward to future years when you have positive income. This carryforward can be valuable if your business becomes profitable in subsequent years.

What’s the deadline for claiming section 179 deduction?

Equipment must be purchased AND placed in service by December 31 of the tax year to claim the 2025 section 179 deduction on your 2025 return. Simply purchasing equipment on December 31st isn’t enough; it must be in actual use. For most equipment, placement in service means installation and operational capability, not just delivery.

How does depreciation recapture work if I sell the equipment?

If you claim section 179 deduction and later sell the equipment for a gain, you may owe tax on part of the gain due to depreciation recapture. This is a specialized tax calculation beyond basic depreciation. Discuss recapture implications with your accountant if you’re planning to sell business assets, as it affects your overall tax position.

Can I claim section 179 for a vehicle used for both business and personal purposes?

Only the business-use percentage qualifies. If you use a vehicle 70% for business and 30% for personal use, you can only claim 70% of the cost as a section 179 deduction. Keep detailed mileage logs to document your business-use percentage, as the IRS scrutinizes vehicle deductions carefully and requires adequate substantiation.

Is section 179 available for pass-through entities like LLCs and S Corps?

Yes. Section 179 applies to all business structures: sole proprietorships, partnerships, LLCs, S Corporations, and C Corporations. The deduction flows through to owners’ tax returns in pass-through entities. However, the limitation (cannot exceed taxable income) applies at the entity level, not the individual owner level.

Related Resources

• Business Owner Tax Strategies and Solutions
• Choose the Right Business Structure for Tax Efficiency
• Comprehensive Tax Strategy Services for Growing Businesses
• Expert Tax Advisory and Planning Guidance
• See How We’ve Helped Business Owners Save on Taxes

Last updated: December, 2025