Construction Equipment Depreciation: Section 179 vs Bonus Depreciation vs MACRS

A contractor who buys a $180,000 excavator can deduct the full cost in the year the machine goes to work. That deduction exists under two separate provisions, IRC 179 (the Section 179 expensing election) and IRC 168(k) (bonus depreciation), and each has different rules, different limits, and different consequences. Most contractors use both in the same year, and the ordering rules determine which provision applies first and how much each one covers. Getting the ordering wrong does not change the total deduction in year one (if both are available, the full cost is deductible either way), but it changes the taxable income calculation, the self-employment tax base, the QBI deduction computation, and the treatment if the asset is disposed of before the end of its recovery period.

How does Section 179 work for construction equipment?

IRC 179 allows a taxpayer to elect to expense (deduct immediately rather than depreciate over time) the cost of qualifying tangible personal property placed in service during the tax year. For construction, this covers virtually all equipment: excavators, loaders, dozers, skid steers, compactors, concrete mixers, trucks (subject to the listed property rules for vehicles under 6,000 lbs GVW), trailers, generators, scaffolding, and tools.

The dollar limits for 2025: the maximum Section 179 deduction is $1,250,000, and the deduction begins to phase out dollar-for-dollar when total qualifying property placed in service exceeds $3,130,000. These limits are indexed for inflation and have been increasing each year. A contractor who buys $2,000,000 in equipment can expense $1,250,000 under Section 179 (and use bonus depreciation for the remaining $750,000). A contractor who buys $4,380,000 or more in equipment gets zero Section 179 deduction (the phase-out eliminates it entirely), but bonus depreciation still covers 100%.

The taxable income limitation: the Section 179 deduction cannot exceed the taxpayer’s taxable income from active trades or businesses. If a contractor has $300,000 in taxable business income and buys $500,000 in equipment, the Section 179 deduction is limited to $300,000. The remaining $200,000 can be deducted under bonus depreciation (which has no taxable income limitation) or carried forward as unused Section 179 to future years.

The election is made on the tax return (Form 4562, Part I) by identifying the specific assets being expensed under Section 179. The election is revocable only with IRS consent, so the choice of which assets to expense under 179 versus bonus depreciation matters and should be made deliberately, not defaulted.

How does bonus depreciation work?

IRC 168(k) allows a 100% first-year depreciation deduction for qualifying property. The One Big Beautiful Bill Act (OBBBA, signed July 4, 2025) made 100% bonus depreciation permanent for property acquired and placed in service after January 19, 2025. This reversed the phase-down that had been in effect (80% for 2023, 60% for 2024, 40% for 2025 under the prior law).

Qualifying property for bonus depreciation: tangible personal property with a MACRS recovery period of 20 years or less. This covers all construction equipment. It also covers used property (not just new), as long as the taxpayer has not previously used the property and the property is not acquired from a related party.

Key differences from Section 179:

• No dollar cap. Bonus depreciation has no maximum amount. A contractor who buys $10,000,000 in equipment can deduct the full amount under bonus depreciation.
• No taxable income limitation. Bonus depreciation can create or increase a net operating loss (NOL). Section 179 cannot.
• No election required for individual assets. Bonus depreciation applies automatically to all qualifying property unless the taxpayer elects out. The election out is made by class of property (all 5-year property, all 7-year property), not by individual asset.
• Applies to used property. A contractor who buys a used excavator at auction gets bonus depreciation. Under Section 179, used property also qualifies, but some state conformity rules differ.

The practical result: for most contractors, bonus depreciation alone covers the full cost of all equipment purchased, and Section 179 is unnecessary. But Section 179 still has advantages in specific situations.

When does Section 179 matter if bonus depreciation covers everything?

Three situations where the Section 179 election is the better choice, even when bonus depreciation is available:

State tax treatment. Several states do not conform to federal bonus depreciation but do conform to 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.

S-corp shareholder basis. For S-corp shareholders, the deduction for Section 179 is taken at the shareholder level, not the entity level, and it reduces the shareholder’s basis in the S-corp stock. This can matter when the shareholder’s stock basis is limited: the Section 179 deduction passes through and may be limited at the shareholder level by the basis, at-risk, and passive activity rules. Bonus depreciation, by contrast, is taken at the entity level and flows through as part of the ordinary business income/loss. The ordering affects which limitation applies first.

Recapture on early disposition. If equipment is sold or disposed of before the end of its MACRS recovery period, the depreciation taken is subject to recapture as ordinary income under IRC 1245. The recapture applies to both Section 179 and bonus depreciation, but the character of the recapture income differs in some situations. More importantly, the Section 179 recapture rules under IRC 179(d)(10) can apply if the property is converted to non-business use, which is a broader trigger than the standard depreciation recapture.

What are the MACRS recovery periods for construction equipment?

When neither Section 179 nor bonus depreciation is used (or for state returns that do not conform), the equipment is depreciated over its MACRS recovery period. The most common recovery periods for construction equipment:

5-year property: Automobiles, light trucks (under 6,000 lbs GVW), computers, software, and some specialized construction equipment classified as “construction type vehicles” under Asset Class 15.0.

7-year property: Most construction equipment that does not fit into 5-year property. This includes general-purpose machinery, tools, and equipment. Office furniture and fixtures also fall here.

15-year property: Land improvements, including site work, fencing, paving, and landscaping at the contractor’s yard or office. These are depreciable but do not qualify for Section 179 (land improvements are excluded from Section 179 qualifying property unless the improvement qualifies as “qualified improvement property”).

Vehicles over 6,000 lbs GVW: Heavy trucks, dump trucks, and equipment haulers that exceed 6,000 lbs gross vehicle weight are not subject to the luxury auto limits under IRC 280F. They can be fully expensed under Section 179 or bonus depreciation in year one. Vehicles under 6,000 lbs GVW are subject to the annual depreciation caps ($20,400 in year one with bonus depreciation for 2025, decreasing in subsequent years).

The depreciation method for MACRS is generally 200% declining balance switching to straight-line (GDS) for 3-, 5-, 7-, 10-, 15-, and 20-year property. The half-year convention applies by default (the asset is treated as placed in service at the midpoint of the year), unless more than 40% of all assets placed in service during the year are placed in service in the last quarter, in which case the mid-quarter convention applies.

How do I handle trade-ins and dispositions?

When a contractor trades an old machine for a new one, the tax treatment depends on whether the transaction is structured as a trade-in (exchange) or as a sale and separate purchase.

Under IRC 1031, like-kind exchanges are limited to real property. Personal property (equipment, vehicles, machinery) no longer qualifies for like-kind exchange treatment after the Tax Cuts and Jobs Act of 2017. A contractor who trades an old excavator for a new one is treated as selling the old excavator and buying the new one separately.

The sale of the old equipment triggers gain or loss recognition. If the old excavator was purchased for $180,000, fully depreciated under Section 179 or bonus depreciation (adjusted basis = $0), and traded in for $60,000 credit toward the new machine, the contractor recognizes $60,000 of gain. That gain is ordinary income under IRC 1245 (recapture of depreciation), not capital gain. The gain is reported on Form 4797.

The new machine’s cost basis is its full purchase price (not reduced by the trade-in credit). If the new excavator costs $220,000 and the trade-in credit is $60,000, the contractor pays $160,000 cash and the new machine’s depreciable basis is $220,000. The contractor can expense the full $220,000 under Section 179 or bonus depreciation.

The netting effect: the contractor recognizes $60,000 of ordinary income from the disposition and deducts $220,000 for the new purchase, for a net deduction of $160,000. This is the same economic result as a direct purchase for $160,000, but the tax return shows both the gain and the deduction separately.

What records should I keep for equipment depreciation?

A fixed asset register is the foundation. Each asset should have: a description (make, model, serial number), the date acquired, the cost (including delivery, setup, and sales tax), the date placed in service (which may differ from the purchase date if the equipment sat in the yard before going to work), the depreciation method (Section 179, bonus, MACRS), the recovery period (5, 7, or 15 years), the annual depreciation amount, and the accumulated depreciation to date.

For dispositions: the date of sale or trade-in, the sale price or trade-in value, the adjusted basis at the time of disposition, and the gain or loss recognized. These feed Form 4797 and the depreciation schedule.

For vehicles subject to the listed property rules (vehicles under 6,000 lbs GVW), the contractor must also maintain a contemporaneous log of business versus personal use. The business-use percentage determines the allowable depreciation. A vehicle used 70% for business can only depreciate 70% of its cost. If business use drops to 50% or below in any year, previously claimed Section 179 and bonus depreciation must be recaptured.

What should I do next?

If you are buying equipment this year, the decision tree is: (1) Does your state conform to federal bonus depreciation? If not, use Section 179 up to the state limit before applying bonus depreciation. (2) Is your taxable income high enough to absorb the deduction? If yes, either method works. If not, bonus depreciation can create an NOL (Section 179 cannot). (3) Are you an S-corp shareholder with basis limitations? If yes, coordinate the Section 179 election with your basis calculation. (4) Do you plan to dispose of the equipment within the recovery period? If yes, plan for the recapture.

• Construction contractor tax deductions, the full tax picture for contractors (accounting method, WIP, QBI deduction)
• Construction worker classification, the 1099 vs W-2 issue that compounds with equipment deduction questions
• Construction retainage, the cash flow constraint that affects equipment purchase timing decisions
• Cost segregation after bonus depreciation, the parallel study for buildings (cost-seg is for real property, Section 179/bonus is for personal property)
• Fix-and-flip tax: dealer classification, when a contractor who flips properties faces dealer status and loses capital gains treatment
• IRS installment agreement, the payment structure for contractors who over-accelerated deductions and face a balance due
• Owner-operator truck deductions, the same Section 179 and bonus depreciation analysis applied to over-the-road tractors and trucking equipment

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