Depreciation Methods for Small Business Assets: Section 179, Bonus, and MACRS

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·7 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Depreciation is how businesses deduct the cost of long-lived assets (equipment, vehicles, machinery, furniture, computers) over time. For small businesses, the three main depreciation methods each have distinct advantages, and the optimal choice depends on the business’s current income, expected future income, and whether the asset generates QBI or is subject to passive activity limitations.

✓Key takeaway

Three depreciation methods for small businesses:

1. Section 179 (IRC 179):

Deduct the FULL cost of qualifying assets in the year they are placed in service
2025 limit: $2,500,000 (indexed for inflation from 2026, when it is $2,560,000)
Phase-out begins at $4,000,000 in total asset purchases (2025; $4,090,000 for 2026)
Qualifying assets: tangible personal property (equipment, machinery, vehicles, furniture, computers), off-the-shelf software, qualified improvement property
Key limitation: Section 179 deduction CANNOT exceed the business’s taxable income (it cannot create a loss). Unused amounts carry forward.
The owner ELECTS Section 179 on a per-asset basis (can choose which assets to expense and which to depreciate)
Vehicles under 6,000 lbs GVWR: subject to luxury auto limits ($20,200 first year with bonus depreciation, 2025; $20,300 for 2026)
Vehicles over 6,000 lbs GVWR: no luxury auto limit, but SUVs up to 14,000 lbs have a Section 179 cap of $31,300 (2025) / $32,000 (2026)

2. 100% bonus depreciation:

Deduct 100% of the cost of qualifying NEW or USED assets in the first year
Restored by OBBBA for property acquired after January 19, 2025, with no scheduled end date (the old phase-down, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, still governs property acquired before January 20, 2025)
CAN create a loss (unlike Section 179, bonus depreciation is not limited to taxable income)
Applies automatically unless the taxpayer elects out
Qualifying assets: same as Section 179, plus used property (Section 179 also covers used property)
Luxury auto limits still apply to passenger vehicles under 6,000 lbs GVWR

3. MACRS (Modified Accelerated Cost Recovery System):

Spread the deduction over the asset’s recovery period:
- 3-year: certain manufacturing tools, race horses
- 5-year: computers, vehicles, office equipment, appliances
- 7-year: office furniture, fixtures, machinery
- 15-year: qualified improvement property (interior improvements to nonresidential buildings), land improvements
- 27.5-year: residential rental property
- 39-year: nonresidential real property (commercial buildings)
Methods: 200% declining balance (GDS, most common), 150% declining balance, or straight-line
Use MACRS when: the business does not have enough income to absorb the full deduction, or the owner wants to spread the deduction across multiple years for tax planning purposes

How do you choose between Section 179, bonus, and MACRS?

Hypothetical example

Round numbers. For current guidance, see IRS Publication 946 (How To Depreciate Property). A small business purchases a $50,000 work truck (GVWR over 6,000 lbs) and $20,000 in equipment. Total purchases: $70,000. Business net income before depreciation: $60,000.

Option 1: Section 179 on everything ($70,000):

Section 179 deduction: $60,000 (limited to taxable income)
Carryforward: $10,000 (to next year)
Taxable income: $0
Tax: $0 (plus SE tax on the $60,000 if sole proprietor, which Section 179 reduces for income tax but the SE base is already calculated)

Section 179 reduces both income tax and self-employment tax (it reduces net profit on Schedule C, which reduces the SE tax base). But the Section 179 deduction cannot exceed the business’s taxable income from ALL active trades or businesses, not just the one that purchased the asset.

Taxable income after Section 179: $0 (from this business)
The $10,000 carryforward reduces next year’s income
Tax savings this year: $60,000 x (24% income + 14.1% SE) = approximately $22,860

Option 2: 100% bonus depreciation on everything ($70,000):

Bonus depreciation: $70,000 (creates a $10,000 loss)
The $10,000 loss can offset other income (spouse’s W-2, investment income)
Subject to the excess business loss limitation (IRC 461(l)): $313,000 for single filers in 2025 ($256,000 in 2026), so the $10,000 loss is well within the limit
Tax savings this year: $70,000 x 38.1% = approximately $26,670 (if the loss offsets income taxed at the same rate)

Option 3: MACRS (5-year, 200% declining balance):

Year 1: $70,000 x 20% = $14,000 (first-year convention)
Year 2: $70,000 x 32% = $22,400
Year 3: $70,000 x 19.2% = $13,440
Year 4: $70,000 x 11.52% = $8,064
Year 5: $70,000 x 11.52% = $8,064
Year 6: $70,000 x 5.76% = $4,032
Taxable income Year 1: $60,000 - $14,000 = $46,000
Tax Year 1: approximately $17,526

Comparison:

Section 179: $0 tax this year, $10,000 deduction next year
Bonus depreciation: $0 tax this year plus a $10,000 loss to offset other income
MACRS: $17,526 tax this year, deductions spread over 6 years

Decision framework:

If income is high enough to absorb the full deduction AND there is no other income to offset: use Section 179 (gives control over exactly how much to deduct)
If the business wants to create a loss to offset other income: use bonus depreciation (the only method that can create a business loss from depreciation)
If income is low or the business expects much higher income in future years: use MACRS (save the deductions for higher-income years when they save more per dollar)
If the business is uncertain: use Section 179 on some assets and MACRS on others (the Section 179 election is per-asset, but bonus depreciation applies by default to the rest unless you elect out, and that election covers a whole class of property)

Vehicle-specific decision:

Over 6,000 lbs GVWR: Section 179 (capped at $31,300 for 2025 on SUVs up to 14,000 lbs) or bonus depreciation on the full cost
Under 6,000 lbs GVWR: luxury auto limits apply. First-year maximum: $20,200 with bonus depreciation (2025; $20,300 for 2026). The remaining cost is depreciated over years 2-6 using MACRS.
Standard mileage rate: cannot be used if the vehicle was depreciated using MACRS or Section 179. Once the business chooses actual expenses with depreciation, it cannot switch to standard mileage for that vehicle.

Illustrative numbers only, not a real client and not advice for your facts.

What happens when bonus depreciation phases out?

For property acquired after January 19, 2025, it doesn’t under current law: the OBBBA set bonus depreciation at 100% for that property with no scheduled phase-down. The old phase-down still applies to property acquired before January 20, 2025, which gets 40% if placed in service in 2025 and 20% if placed in service in 2026. The remaining cost not covered by bonus depreciation is recovered over the asset’s regular MACRS useful life (5 years for equipment, 7 years for office furniture, 39 years for commercial buildings). Section 179 remains available either way, subject to its own annual dollar limits.

When is regular MACRS better than expensing a work truck?

Regular MACRS makes sense when you’d rather save deductions for higher-income years, but getting it takes a deliberate election. If you skip Section 179, a truck and equipment acquired after January 19, 2025 get 100% bonus by default. To use regular MACRS, you elect out of bonus for the whole class of property placed in service that year.

So the per-asset flexibility in the decision framework above really comes from Section 179, which lets you choose the assets and even part of an asset’s cost. Assets you don’t expense still get bonus unless you elect out for the class, and that election can be revoked only with IRS consent. For the truck, business use has to be more than 50% for either write-off, and an SUV-type vehicle over 6,000 lb has a Section 179 cap of $31,300 for 2025 and $32,000 for 2026. Business Depreciation Methods Compared lines the options up side by side.

Business Depreciation Methods Compared: MACRS, Section 179, Bonus Depreciation, and Straight-Line

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Cite this page

Yarik Yarosh, CPA. "Depreciation Methods for Small Business Assets: Section 179, Bonus, and MACRS." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-depreciation-methods-explained

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

Depreciation Methods for Small Business Assets: Section 179, Bonus, and MACRS

How do you choose between Section 179, bonus, and MACRS?

What happens when bonus depreciation phases out?

When is regular MACRS better than expensing a work truck?

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