Construction Equipment Depreciation: Section 179, Bonus Depreciation, and MACRS for Contractors

Construction is one of the most capital-intensive industries in the U.S. economy. After labor, equipment is the largest expense a contractor carries, and the difference between a profitable year and a mediocre one often comes down to how that equipment cost flows through the tax return. A general contractor who buys a $350,000 excavator, a $75,000 pickup truck, and $40,000 in small tools has three overlapping federal depreciation mechanisms available: Section 179 expensing, bonus depreciation, and the regular MACRS cost-recovery system. Each one has different dollar limits, different eligibility rules, and different interactions with taxable income. Getting the combination right can mean writing off the full cost of a major purchase in the year it goes into service, or spreading it over five, seven, or fifteen years. Getting it wrong can mean paying tax on phantom income while equipment value is declining in the field.

What MACRS recovery period applies to my equipment?

The Modified Accelerated Cost Recovery System (MACRS) assigns every depreciable asset a recovery period based on its class life. Most construction equipment falls into the 7-year class, but several important categories are shorter or longer, and misclassifying an asset means recovering costs over the wrong number of years.

The four classes contractors encounter most often are the 5-year class (automobiles, light-duty trucks under 6,000 lbs GVWR, computers, and copiers), the 7-year class (the workhorse category that includes excavators, bulldozers, loaders, cranes, backhoes, concrete equipment, dump trucks, office furniture, and most other tangible personal property without a specific shorter assignment), the 15-year class (land improvements such as parking lots, driveways, site fencing, landscaping, drainage structures, and sidewalks), and the 39-year class (nonresidential buildings such as an office, shop, or warehouse).

The distinction matters most for contractors who build or improve their own facilities. Paving the yard at a construction company’s headquarters is a 15-year land improvement, not a 39-year building, but only if it is properly classified on the depreciation schedule. The building itself is 39 years. A cost segregation study can reclassify components of a building into shorter-lived categories, accelerating the deduction.

For the equipment used on jobs (the excavators, the dump trucks, the compactors), the 7-year class is almost always correct. Small tools and equipment with a class life of four years or less fall into the 5-year class, though most contractors expense these under Section 179 or the de minimis safe harbor anyway.

How does Section 179 work for construction equipment?

IRC 179 allows a taxpayer to elect to deduct the cost of qualifying property as an expense in the year the property is placed in service, rather than depreciating it over its MACRS life. For 2025, the maximum Section 179 deduction is $2,500,000 (raised from $1,250,000 by the One Big Beautiful Bill Act), and this limit is indexed for inflation annually ($2,560,000 for 2026 per Rev. Proc. 2025-32). The deduction begins to phase out dollar-for-dollar when total Section 179-eligible property placed in service during the year exceeds $4,000,000 (the 2025 threshold, $4,090,000 for 2026, also indexed).

Qualifying property for Section 179 purposes includes tangible personal property (machinery, equipment, vehicles, computers, office furniture) and certain improvements to nonresidential real property known as qualified improvement property. It does not include land, buildings (the structural shell), or most land improvements. That 15-year parking lot does not qualify for Section 179, though it does qualify for bonus depreciation.

The most important limitation of Section 179 is the taxable income cap. The Section 179 deduction for the year cannot exceed the taxpayer’s aggregate taxable income from all active trades or businesses. If a contractor’s taxable income before the Section 179 deduction is $800,000 and the contractor elects $1,000,000 of Section 179, only $800,000 is deductible. The remaining $200,000 carries forward to future years (it is not lost), but it cannot create or increase a net operating loss. This is the key difference from bonus depreciation.

Section 179 is an election, not automatic. The taxpayer designates specific assets for the Section 179 deduction on Form 4562, and the election is made on the original return for the year (or on an amended return filed within the time allowed). There is flexibility in choosing how much to expense and which assets to apply it to, which creates planning opportunities when taxable income is variable from year to year.

What changed with bonus depreciation under OBBBA?

The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025. This is a significant change from the trajectory set by the Tax Cuts and Jobs Act of 2017, which had set a declining schedule that would have reduced bonus depreciation to zero by 2027. The OBBBA eliminated that phase-down entirely. Bonus depreciation is 100%, permanently, with no scheduled reduction.

IRC 168(k) provides the rules. Bonus depreciation applies to property with a MACRS recovery period of 20 years or less (covering 5-year, 7-year, and 15-year property, which includes most construction equipment and land improvements), certain computer software, water utility property, and qualified improvement property. Unlike Section 179, bonus depreciation has no dollar cap. A contractor who places $5 million of qualifying equipment in service can deduct $5 million in bonus depreciation. And unlike Section 179, bonus depreciation has no taxable income limitation, meaning it can create or increase a net operating loss (NOL) that carries forward to offset income in future years.

Bonus depreciation applies to both new and used property, provided the used property is “first use” by the taxpayer. A contractor who buys a used excavator at auction qualifies for bonus depreciation on the purchase price as long as the contractor has not previously used that specific machine. The “first use” requirement prevents a taxpayer from selling an asset and re-purchasing it to claim another round of bonus.

Bonus depreciation is the default. Unless the taxpayer elects out of bonus depreciation for an asset class (an annual, irrevocable election by class), bonus depreciation applies automatically to all qualifying property placed in service during the year. This matters for planning: a contractor who wants to spread deductions over several years must affirmatively elect out of bonus for the relevant class.

How do Section 179, bonus, and MACRS interact?

The three mechanisms apply in a specific sequence. First, the taxpayer elects Section 179 on chosen assets (up to the annual limit, subject to the taxable income cap). Second, bonus depreciation applies automatically to the remaining depreciable basis of all qualifying property that was not fully covered by Section 179. Third, regular MACRS depreciation applies to any basis not covered by the first two, spreading it over the applicable recovery period using the declining-balance method.

In practice, this ordering gives contractors considerable flexibility. For a year with strong taxable income, the contractor might elect the full Section 179 amount on the most expensive assets and let bonus depreciation cover the rest, writing off the entire equipment spend in year one. For a year with lower income, the contractor might skip Section 179 entirely (or elect a partial amount to stay within the taxable income cap), let bonus depreciation handle the big-ticket items (where it can create an NOL), and use regular MACRS for assets the contractor wants to spread over time.

The election-out option on bonus depreciation is by class, not by asset. If a contractor elects out of bonus for 7-year property, it applies to all 7-year property placed in service that year. The contractor cannot cherry-pick which excavators get bonus and which do not, except by using Section 179 on specific assets first.

When does Section 179 still matter over bonus depreciation?

With bonus depreciation permanent at 100%, Section 179 might seem redundant. In most cases it is, but three situations make the Section 179 election the better choice even when bonus depreciation covers the same cost.

The first is state tax treatment. Several states do not conform to federal bonus depreciation but do allow Section 179, sometimes with a lower dollar limit. In those states, a deduction taken as Section 179 produces a state tax deduction, while the same deduction taken as bonus depreciation does not. California, for example, does not allow bonus depreciation but allows Section 179 up to $25,000. A California contractor who expenses a $200,000 machine entirely under bonus depreciation gets no California deduction in year one. A contractor who expenses $25,000 under Section 179 and the remaining $175,000 under bonus depreciation gets a $25,000 California deduction in year one and must depreciate the rest over the MACRS recovery period on the California return.

The second is S-Corp shareholder basis. For S-Corp shareholders, the Section 179 deduction passes through at the shareholder level and reduces the shareholder’s basis in their S-Corp stock. Bonus depreciation, by contrast, is taken at the entity level and flows through as part of ordinary business income or loss. The ordering affects which limitation (basis, at-risk, passive activity) applies first. When a shareholder’s stock basis is limited, the difference in how Section 179 and bonus depreciation pass through can determine whether the deduction is currently usable or suspended.

The third is recapture on early disposition. If equipment is sold or converted to non-business use before the end of its MACRS recovery period, the depreciation taken is subject to recapture as ordinary income under IRC 1245. Both Section 179 and bonus depreciation trigger recapture, but the Section 179 recapture rules under IRC 179(d)(10) apply specifically when property is converted to non-business use, which is a broader trigger than the standard depreciation recapture. A contractor who buys a pickup for business and later converts it to personal use faces different recapture treatment depending on which provision the original deduction was taken under.

Why do vehicles over 6,000 lbs GVWR get a better deal?

IRC 280F imposes annual dollar limits on the depreciation deduction for “listed property,” which includes passenger automobiles. For 2025, the first-year depreciation limit for a passenger vehicle (including any bonus depreciation) is approximately $20,400, with lower limits in years two through four and beyond. These caps exist to prevent taxpayers from writing off luxury cars as business expenses in a single year.

But there is an exception. Vehicles with a gross vehicle weight rating (GVWR) exceeding 6,000 pounds are not subject to the Section 280F caps. This means a $75,000 Ford F-250 (GVWR: 10,000 lbs), a Ram 2500, a Chevy Silverado 2500HD, or any heavy-duty pickup, SUV, or van that crosses the 6,000-lb GVWR threshold can be fully expensed using Section 179 or bonus depreciation in the year it is placed in service. The deduction is limited to the business-use percentage of the vehicle (if it is used 80% for business, the deduction is 80% of the cost), but there is no annual dollar cap on the depreciation itself.

For contractors, this is often the most immediately useful provision. The pickup truck that runs between job sites, hauls materials, and tows trailers is a core piece of business equipment. As long as it is over 6,000 lbs GVWR (most 3/4-ton and 1-ton pickups qualify, while most half-ton pickups do not), the full purchase price is deductible in year one, subject to the business-use percentage requirement. Vehicles under 6,000 lbs GVWR remain subject to the 280F caps, which means a $50,000 half-ton truck yields a first-year deduction of about $20,400 (with bonus), not $50,000.

The GVWR is printed on the vehicle’s door jamb sticker and in the manufacturer’s specifications. It is not the curb weight or the payload capacity; it is the manufacturer’s maximum rated loaded weight.

Can I deduct used equipment the same way as new?

Yes. Since the Tax Cuts and Jobs Act of 2017, both Section 179 and bonus depreciation apply to used property. Before TCJA, bonus depreciation was available only for new (original-use) property. That restriction is gone.

The qualification for used property under bonus depreciation is straightforward: the property must be acquired by purchase (not from a related party, not in certain tax-free transactions), and it must be the taxpayer’s “first use” of that specific asset. A contractor who buys a five-year-old Caterpillar 320 excavator from a dealer, at auction, or from another contractor qualifies for 100% bonus depreciation on the full purchase price. The same contractor cannot sell the machine to a related entity and have that entity claim bonus again.

This rule makes the secondary equipment market far more attractive from a tax standpoint than it was before 2018. A used machine purchased at 60% of the new price still qualifies for full expensing, and the tax savings may be nearly the same as buying new (assuming the same tax rate and the same business-use percentage). The economics of buying used equipment improved substantially when Congress opened bonus depreciation to used property.

For Section 179, used equipment has always been eligible. The TCJA change was specific to bonus depreciation.

What happened to like-kind exchanges for equipment?

Before the Tax Cuts and Jobs Act, IRC 1031 allowed taxpayers to defer gain on the exchange of like-kind property, and that included personal property such as construction equipment. A contractor could trade in an old excavator on a new one, defer the gain on the old machine, and carry over the adjusted basis into the new asset. After TCJA (effective for exchanges completed after December 31, 2017), Section 1031 applies only to real property. Equipment, vehicles, and all other personal property are excluded.

The practical effect is that trading in an old machine is now a two-step taxable transaction. The contractor sells the old machine (recognizing gain or loss based on the difference between the trade-in value and the adjusted basis) and purchases the new machine (which is eligible for Section 179 and bonus depreciation on its full cost). The gain on the old machine is taxable in the year of the trade-in, but the full cost of the new machine is deductible in the year it goes into service.

For contractors who have been expensing equipment aggressively, the adjusted basis of the old machine is often zero (or close to zero), which means the entire trade-in value is gain. If a contractor bought an excavator for $300,000, expensed it fully using bonus depreciation, and later trades it in for $120,000 on a new $350,000 machine, the contractor recognizes $120,000 of gain on the trade-in and deducts $350,000 on the new purchase. The net deduction is $230,000, not $350,000. This is less favorable than the pre-TCJA treatment, where the $120,000 gain would have been deferred entirely, but the availability of 100% bonus depreciation on the new machine’s full cost offsets much of the impact.

The gain on the disposition is ordinary income to the extent of prior depreciation (depreciation recapture under IRC 1245), which for fully expensed equipment means the entire gain is ordinary.

Do all states follow the federal depreciation rules?

No, and this is one of the most common surprises for contractors. Many states do not conform to federal bonus depreciation, or they conform with modifications. Some states have lower Section 179 limits than the federal limit. A contractor who deducts $500,000 of bonus depreciation on the federal return may need to add back some or all of that amount on the state return and depreciate the assets over their MACRS lives for state purposes, creating a multi-year difference between federal and state taxable income.

States that historically decouple from federal bonus depreciation include California, New Jersey, Pennsylvania, Maryland, and several others. The specific rules change frequently as states update their conformity dates, so the current status in any given state should be verified each year. Contractors operating in multiple states (common in construction, where projects cross state lines) may have different depreciation schedules for each state return.

The state conformity issue also affects the Section 179 deduction. Some states cap the Section 179 deduction at a lower amount than the federal limit, or use an older (lower) version of the limit. A contractor who elects $2,500,000 of Section 179 on the federal return may find that the state limits the deduction to $25,000 or $500,000, creating an add-back on the state return.

For entity structure planning, state conformity matters because the depreciation deductions flow through differently depending on whether the contractor operates as a sole proprietorship, an LLC, an S corporation, or a C corporation. The entity type itself does not change the depreciation rules (Section 179 and bonus depreciation are available to all entity types, with some S corporation and partnership pass-through considerations), but the way the state taxes the entity’s income can amplify or diminish the value of the depreciation deduction.

How does equipment depreciation fit the tax picture?

Depreciation does not exist in isolation. The equipment deductions interact with every other piece of the contractor’s tax position. The accounting method determines when revenue is recognized (cash vs accrual vs percentage-of-completion), and large depreciation deductions are most valuable when offset against revenue that has already been recognized. A contractor using the percentage-of-completion method may be recognizing revenue on projects that are still in progress, making equipment deductions particularly valuable for reducing the current-year tax on income that has not yet been collected.

The job costing system tracks equipment costs at the project level, but for tax purposes the depreciation deduction is computed on the total equipment placed in service during the year, not allocated to specific jobs. The WIP schedule and the depreciation schedule are separate documents that interact through the income statement: revenue from the WIP schedule minus depreciation from the fixed-asset schedule (plus other deductions from the contractor deduction analysis) equals taxable income.

Contractors who buy and sell equipment regularly need to track the adjusted basis of every asset to compute gain or loss on disposition. Because Section 179 and bonus depreciation reduce the basis to zero in year one, any sale proceeds are fully taxable as ordinary income (depreciation recapture). This is worth planning around, particularly in years when a contractor is disposing of several older machines and acquiring replacements.

How do I maximize equipment deductions before year-end?

Equipment must be “placed in service” during the tax year to qualify for that year’s depreciation deductions. “Placed in service” means ready and available for use in the business, not merely ordered or paid for. A backhoe that is delivered on December 28 and used on a job site on December 30 is placed in service in that year. A backhoe that is ordered in November, paid for in December, but not delivered until January 3 of the following year is placed in service in the following year.

For contractors planning equipment purchases near year-end, the delivery date and operational readiness are the controlling factors. Coordinate with the dealer to ensure delivery before December 31 if the deduction is needed in the current year. Document the placed-in-service date with delivery receipts, GPS records from the equipment, or job logs showing the machine on site.

If taxable income is uncertain heading into the fourth quarter, consider the interaction between Section 179 (which cannot exceed taxable income) and bonus depreciation (which can create an NOL). A contractor who is unsure whether income will support a large Section 179 election can rely on bonus depreciation for the certainty of a full deduction without the income limitation. The Section 179 election can be fine-tuned up to the filing deadline (including extensions), giving additional flexibility to optimize the split.

For more on how retainage and revenue recognition timing interact with these deductions, the revenue side of the equation is just as important as the expense side when planning year-end equipment purchases.

Related guides:

• Tax Implications of Business Equipment Trade-Ins After TCJA: No More Like-Kind on Personal Property

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.