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

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·8 min read

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

Small business owners have three main ways to deduct the cost of business equipment, vehicles, and property: Section 179 expensing, bonus depreciation, and regular MACRS depreciation. Each method has different rules, limitations, and strategic implications. Section 179 allows immediate deduction of the full purchase price up to an annual limit ($2,500,000 for 2025, adjusted for inflation from 2026), but it can’t create a business loss. Bonus depreciation (100% for property acquired after January 19, 2025, restored by the One Big Beautiful Bill Act with no scheduled end date) also allows immediate deduction with no annual dollar limit, and it CAN create a business loss. MACRS (Modified Accelerated Cost Recovery System) spreads the deduction over the asset’s recovery period (5-7 years for most business equipment) and is the default when neither Section 179 nor bonus depreciation is elected or available.

✓Key takeaway

Three depreciation methods compared:

Feature	Section 179	Bonus Depreciation	MACRS
Deduction timing	100% Year 1	100% Year 1	Spread over 5-27.5 years
Annual dollar limit (2025)	$2,500,000	No limit	No limit
Phase-out threshold (2025)	$4,000,000	None	None
Can create a loss?	No (limited to business income)	Yes	Yes
Used property eligible?	Yes	Yes (since TCJA 2017)	Yes
Real property eligible?	QIP, roofs, HVAC, fire/alarm and security systems (by election)	Yes (QIP)	Yes
Vehicles over 6,000 lbs	No IRC 280F cap; SUVs up to 14,000 lbs capped at $31,300 (2025)	Full cost, no cap	Full cost, no cap
Vehicles under 6,000 lbs	IRC 280F cap ($20,200 Year 1, 2025)	IRC 280F cap ($20,200 Year 1, 2025)	$12,200 Year 1 (2025)
Election	Per-asset	Opt out per class	Default

Section 179 ($2,500,000 limit for 2025):

Best for: businesses that want Year 1 deduction but don’t want to create a loss
Cannot exceed the business’s net income from ALL trades or businesses
Unused Section 179 carries forward to future years (unlike bonus depreciation)
Must be elected on the tax return for the year the asset is placed in service
Applies to: tangible personal property, computer software, qualified improvement property
The limit is $2,560,000 for 2026 (inflation-adjusted)

Bonus depreciation (100%, restored with no scheduled end date):

Best for: businesses that want the largest possible Year 1 deduction (or need to create a loss)
No annual dollar limit (a $5 million purchase gets full bonus depreciation)
CAN create a business loss (which carries forward as an NOL)
Applies to: new AND used property with a recovery period of 20 years or less
The OBBBA restored 100% bonus depreciation, with no scheduled end date, for property acquired after January 19, 2025 (earlier acquisitions stay on the old phase-down: 40% if placed in service in 2025, 20% in 2026)
Applies automatically unless the taxpayer elects out

MACRS (regular depreciation):

Best for: businesses that want to spread deductions over multiple years (defer deductions to higher-income years)
Common recovery periods:
- 5-year: vehicles, computers, office equipment, appliances
- 7-year: office furniture, trade tools
- 15-year: land improvements, qualified improvement property
- 27.5-year: residential rental property
- 39-year: nonresidential real property (commercial buildings)
Accelerated methods (200% or 150% declining balance) front-load deductions
Straight-line option available for any asset class

Which depreciation method should you choose?

Hypothetical example

Round numbers. A new HVAC business. Year 1. Single filer. Purchased a van ($45,000, over 6,000 lbs) and equipment ($15,000).

Scenario 1: Section 179 everything Total placed in service: $60,000 Section 179 election: $60,000 Other income (first-year revenue minus expenses): $50,000 Section 179 deduction limited to $50,000 (cannot create a loss) Remaining $10,000 carries forward to Year 2 Net income: $0 Tax: $0

Scenario 2: Bonus depreciation everything Total placed in service: $60,000 Bonus depreciation: $60,000 Other income: $50,000 Net income: -$10,000 (loss) NOL of $10,000 carries forward to Year 2 Tax: $0

Scenario 3: MACRS only (no Section 179 or bonus) Van: 5-year MACRS, 200% DB. Year 1: $45,000 x 20% = $9,000 Equipment: 7-year MACRS, 200% DB. Year 1: $15,000 x 14.29% = $2,144 Total Year 1 depreciation: $11,144 Net income: $50,000 - $11,144 = $38,856 Tax: approximately $7,500

Comparison:

Method	Year 1 Tax	Year 2 Benefit
Section 179	$0	$10,000 carry-forward
Bonus	$0	$10,000 NOL carry-forward
MACRS	$7,500	Remaining depreciation in Years 2-7

For most small businesses, Section 179 or bonus depreciation in Year 1 is optimal because:

Tax saved today is worth more than tax saved in future years (time value of money)
The business may not need the deductions in future years (could sell the business, change structure, etc.)
Future tax rates could change

When MACRS makes sense:

Year 1 income is low (the Section 179/bonus deduction is wasted on the lowest tax bracket)
You expect significantly higher income in Years 2-5
You want to match depreciation expense to when the asset actually generates revenue

The vehicle trap (under 6,000 lbs): A contractor buys a Toyota Tacoma ($38,000, under 6,000 lbs GVWR) for 100% business use.

IRC 280F limits (2025):

Year 1 with bonus depreciation: $20,200
Year 2: $19,600
Year 3: $11,800
Year 4+: $7,060/year

Total recovery:

Year 1: $20,200
Year 2: $19,600
Year 3: $11,800
Remaining basis: $38,000 - $51,600 = already fully depreciated by Year 3

The same contractor buying an F-250 ($42,000, over 6,000 lbs):

Year 1: $42,000 (full Section 179 or bonus, no IRC 280F limit)
Fully deducted in Year 1

The F-250 costs $4,000 more but produces a $21,800 larger Year 1 deduction. At 25% marginal rate: $5,450 in additional Year 1 tax savings. The larger truck is cheaper after taxes.

Listed property rules (under 50% business use): If business use of an asset drops below 50%, listed property rules under IRC 280F(b) require:

Recapture of excess depreciation (including Section 179)
Switch to straight-line depreciation going forward
Report the recapture as ordinary income

Assets subject to listed property rules: vehicles, computers, cell phones (if used less than 50% for business). Assets NOT subject: trade tools, construction equipment, office furniture.

Keep a usage log for the first year of any listed property to establish the business-use percentage. This log is your defense in an audit.

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

Should a new HVAC business take Section 179 or bonus?

In a first year like the one above, the answer turns on the $10,000 that doesn’t fit. Section 179 stops at your taxable income from active businesses and carries the rest forward. Bonus takes the full cost of property acquired after January 19, 2025 and turns the excess into a loss. If you also had W-2 wages that year, they count toward the Section 179 limit, so there may be no carryforward at all.

A bonus loss has limits too. For individuals, business losses above $313,000 ($626,000 joint) for 2025, or $256,000 ($512,000 joint) for 2026, become an NOL, and an NOL can offset only 80% of taxable income in a later year. At $10,000 neither limit comes into play. If the business is an S corporation or partnership, Section 179 limits apply to the entity and again to each owner. And for a smaller deduction, Section 179 lets you expense part of an asset’s cost, while bonus can only be turned off for a whole class.

How do vehicle caps change the MACRS vs Section 179 choice?

For a pickup rated at 6,000 lb or less, like the Tacoma above, the depreciation caps set the first-year ceiling. For 2025 the most you can deduct in year one is $20,200 if bonus applies and $12,200 if it doesn’t. For 2026 it’s $20,300 and $12,300. Electing out of bonus for 5-year property drops that truck to the lower cap.

Over 6,000 lb, the passenger auto caps don’t apply, but an SUV-type vehicle up to 14,000 lb has its own Section 179 cap of $31,300 for 2025 and $32,000 for 2026. Either way, business use has to be more than 50% in the first year to get Section 179 or bonus at all. The contractor tax planning guide covers vehicles for trade businesses, and Depreciation Methods for Small Business Assets has a second worked example.

Depreciation Methods for Small Business Assets: Section 179, Bonus, and MACRS
Tax planning for HVAC, plumbing, and electrical contractors, how vehicle depreciation, parts inventory, and service agreement income work for equipment-intensive trade contractors

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Cite this page

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

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: Section 179, Bonus, and MACRS Explained

Which depreciation method should you choose?

Should a new HVAC business take Section 179 or bonus?

How do vehicle caps change the MACRS vs Section 179 choice?

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