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

By Yarik Yarosh, CPA ·September 5, 2026 ·5 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
2024 limit: $2,500,000 (indexed for inflation; OBBBA raised the limit to $2,560,000 starting in 2026)
Phase-out begins at $4,000,000 in total asset purchases (2024)
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 ($12,400 first year with bonus depreciation, 2024)
Vehicles over 6,000 lbs GVWR: full Section 179 (no luxury auto limit)

2. 100% bonus depreciation:

Deduct 100% of the cost of qualifying NEW or USED assets in the first year
Permanently restored by OBBBA (was phasing down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027; OBBBA reversed this)
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. 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)

Wait, important clarification: 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)): $305,000 for single filers, 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 election is per-asset, giving maximum flexibility)

Vehicle-specific decision:

Over 6,000 lbs GVWR: Section 179 or bonus depreciation on the full cost
Under 6,000 lbs GVWR: luxury auto limits apply. First-year maximum: $12,400 with bonus depreciation (2024). 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.

Related guides:

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. 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.