Section 179 vs. 100% Bonus Depreciation: Year-End Equipment-Buying Decisions

For many taxpayers, maximizing the current year deduction is the best course of action. However, it is often more advantageous to take less of a deduction in the initial year in order to maximize the tax rate that applies to the deduction. Following are factors that need to go into planning to maximize the tax savings:

A Littleton contractor who buys a $480,000 excavator in December can deduct the whole cost on the 2026 return. Add a $140,000 roof and the instinct is to claim $620,000 in deductions. Depending on the tax situation, that may or may not be the best course of action.

What Does the Section 179 vs. Bonus Depreciation Choice Come Down To?

Bonus depreciation has no cap and no income limit. Section 179 has both, but applies to property bonus does not.

Sources: IRS Rev. Proc. 2025-32, section 4.24, and IRS Publication 946. The $6,650,000 figure is derived, not published.

How Can Bonus Depreciation and Section 179 Be Used in Tax Planning?

Consider a situation where a business purchases $100,000 of equipment and replaces the roof on the production facility they own for $60,000. The business can maximize the current year deduction by claiming bonus depreciation on the equipment and electing Section 179 on the roof. If the business has enough income to claim all the Section 179 deduction in the current year and the income flows through to an individual return taxed at the maximum 37%, this combination optimizes the tax savings.

However, change the facts slightly so that this occurs in an unusually poor income year where the taxpayer has a marginal tax rate of 24%. In this case, the taxpayer can receive more benefit of the depreciation in a different tax year. In that instance, the taxpayer might be better off by electing the Section 179 deduction for the roof and electing out of bonus depreciation on the equipment.

Another situation where planning can maximize tax savings is when a taxpayer has a net operating loss for the current year. Net operating losses can only offset 80% of the taxable income in future years. If a taxpayer makes a Section 179 election for the assets placed in service during the year, that deduction carries over to a year where there is positive income. Since the 80% limitation does not apply to a Section 179 deduction, taxpayers can sometimes receive the benefit of the deductions quicker by making a Section 179 election and applying the Section 179 limitations rather than the NOL limitations. This is especially true for a C corporation that does not need to take the rate brackets into account.

New Qualified Production Facility Deduction

One carve-out opened last year. Section 168(n) allows a 100% allowance on nonresidential real property used as an integral part of a qualified production activity. Construction has to begin after January 19, 2025 and before January 1, 2029, and the property has to go into service after July 4, 2025 and before January 1, 2031. Contractors putting up new production space should read IRS Notice 2026-16 first. Note that these provisions have more stringent depreciation recapture rules and it may not always make sense to take this deduction.

Other Limitations

Other limitations still apply. Noncorporate owners face the excess business loss limit, which for 2026 disallows business losses above $256,000, or $512,000 on a joint return. That is lower than 2025’s $313,000 and $626,000, and it is not a typo. Section 70601(b) of the OBBBA re-based the inflation adjustment to 2025. Partners and shareholders also need basis and at-risk amounts to absorb the loss.

Used equipment is eligible either way. However, section 168(k)(2)(E) and Treasury Regulation section 1.168(k)-2(b)(3)(iii) deny bonus depreciation if you or a predecessor used the property before. The OBBBA renumbered that clause, so older write-ups cite (E)(ii).

Section 179(d)(2) and (3) go further. They rule out a purchase from a related party, a transfer between members of a controlled group, carryover basis, property inherited under section 1014, and basis rolled in from a trade-in.

Does Bonus Depreciation Shrink Your Section 179 Deduction?

It can, and this is the trap that costs year-end buyers the most. Section 179 is capped at your taxable income from the active conduct of a trade or business, and you compute that income after depreciation including bonus depreciation.

What Does That Look Like on a $620,000 Equipment Year?

Take a calendar-year S corporation in Littleton with $310,000 of taxable income from its active business, figured before any depreciation on the new assets and before any Section 179 deduction. In October 2026 it places two assets in service. A used $480,000 excavator, which is five-year property and bonus-eligible, and a $140,000 roof on the shop it already occupies, which is 39-year property and Section 179 only. Purchases sit far below the $4,090,000 phase-out.

1. Section 179 on the roof, bonus on the excavator. Bonus takes $480,000. The income limit is $310,000 less $480,000, so it is zero. The $140,000 election carries forward and cannot be used in the current year. Total: $480,000.
2. No Section 179 election at all. Bonus still takes $480,000, and the roof depreciates on the 39-year table at 0.535% for an October placement, or $749. Total: $480,749.
3. Elect out of bonus for the five-year class, then elect Section 179 on the roof. The excavator falls back to MACRS. It is the only depreciable personal property placed in service and it lands in the fourth quarter, so the mid-quarter rate applies: 5.00% of $480,000, or $24,000. The limit is now $286,000, and the $140,000 roof election clears it in full. Total: $164,000.

Which of Those Three Answers Is the Right One?

This is an example where tax planning is critical. For some taxpayers, the goal is to accelerate the depreciation as quickly as possible. For other taxpayers, the goal is to take the deductions at the highest marginal tax rate.

Does the Equipment Have to Be Running Before December 31?

It has to be ready to run, because the IRS ties the depreciation deduction to the placed-in-service date rather than to the purchase order or the payment.

Section 179 reduces the basis counted for the mid-quarter test, and bonus depreciation does not. Taxpayers can often eliminate the application of the mid-quarter convention by selecting specific assets for a Section 179 election.

What If You Signed the Contract Before January 20, 2025?

Then the 100% rate may not be yours. Section 70301(c)(4) of the One Big Beautiful Bill Act provides that property “shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition.” A machine delivered in 2026 on a 2024 purchase order was acquired in 2024.

That puts it back on the old phase-down: 40% for property placed in service during 2025, and 20% for property placed in service during 2026, per IRS Rev. Proc. 2026-15. The old rule also reaches only property placed in service before January 1, 2027, so the same order slipping into January gets nothing. On a $480,000 excavator that is $96,000 of bonus in 2026 and zero a few weeks later.

Check the contract date on anything with a long lead time. Our explainer on IRS Notice 2026-11 and 100% bonus depreciation covers how the IRS reads acquisition dates and binding contracts. Assets that fall under this rule are a good candidate for a Section 179 election.

How Do the Vehicle Limits Change the Math?

Gross vehicle weight decides almost everything. A passenger automobile placed in service in 2026 is capped at $20,300 of first-year depreciation, Section 179 and bonus included, or $12,300 without bonus, per Rev. Proc. 2026-15, Tables 1 and 2. Rate a truck, van or SUV above 6,000 pounds and those caps fall away.

Take a $95,000 SUV at 7,000 pounds, used entirely for business. The Section 179 SUV limit stops at $32,000, and bonus takes the other $63,000. First-year deduction: $95,000. At 100% bonus, the cap moves which line the deduction sits on, not the total.

Two cliffs sit underneath. Business use has to exceed 50%, or Section 179 and bonus both disappear. If it later drops to 50% or below, section 280F(b)(2) pulls the excess depreciation back into income. That is what the mileage log is for.

Does Colorado Follow the Federal Deduction?

Yes for depreciation, and the reason is narrower than general conformity. Colorado starts from federal taxable income, and its list of required add-backs has no depreciation item on it.

The add-backs that follow run to Colorado and foreign income taxes, the federal net operating loss deduction, unauthorized-alien labor costs, restricted-membership club expenses, the gross conservation easement deduction, business meals, and the section 250 FDDEI deduction. The word depreciation appears nowhere in the guide.

The list nearly got longer. House Bill 26-1222 would have required add-backs for four OBBBA provisions, sections 163(j), 168(k), 168(n) and 174A, starting with tax years beginning on or after January 1, 2027. Senate Finance postponed it indefinitely by a 7 to 1 vote on May 11, 2026.

One detail still bites. Pass-through owners above $500,000 of adjusted gross income, or $1,000,000 filing jointly, add back the federal qualified business income deduction, covered in our guide to Colorado’s 2026 small business tax changes.

Next Steps

Run the income limit before you make the election. Also, compare your expected current year marginal tax rate to your expected rate in future years.

1. Confirm the placed-in-service date for every asset, installation and hookup included, before December 31.
2. Pull the contract date on anything ordered before January 20, 2025 and check which bonus percentage it carries.
3. Project the bonus depreciation your 2026 purchases generate, subtract it from business income, and read off the real Section 179 ceiling. For an S corporation, test it at both the S corporation and the individual owner.
4. Total your 2026 qualifying purchases against $4,090,000, then model the effect on your Section 199A deduction, the excess business loss cap, and basis.
5. If you began self-constructing a larger asset before January 20, 2025, ask whether the component election reaches its later components.

Contact Us

Equipment decisions made in December are hard to undo in April, and the right election turns on your entity, your income, and what you actually place in service. Steve Barkmeier, CPA, and the WhippleWood tax team can model it against your own numbers. Pair this with our year-end tax planning guide for business owners and our financial benchmarks for construction contractors, or email info@whipplewood.com.