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

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

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 2024, adjusted for inflation), but it can’t create a business loss. Bonus depreciation (100%, permanently restored by the One Big Beautiful Bill Act) 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 (2024)	$2,500,000	No limit	No limit
Phase-out threshold (2024)	$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?	Qualified improvement property only	Yes (QIP)	Yes
Vehicles over 6,000 lbs	Full cost, no IRC 280F cap	Full cost, no cap	Full cost, no cap
Vehicles under 6,000 lbs	IRC 280F cap ($20,400 Year 1)	IRC 280F cap ($20,400 Year 1)	$12,400 Year 1
Election	Per-asset	Opt out per class	Default

Section 179 ($2,500,000 limit for 2024):

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
OBBBA increased the limit to $2,560,000 starting 2026

Bonus depreciation (100%, permanently restored):

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 permanently restored 100% bonus depreciation (was scheduled to phase down)
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 (2024):

Year 1 with bonus depreciation: $20,400
Year 2: $19,800
Year 3: $11,900
Year 4+: $7,160/year

Total recovery:

Year 1: $20,400
Year 2: $19,800
Year 3: $11,900
Remaining basis: $38,000 - $52,100 = 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 $21,600 larger Year 1 deduction. At 25% marginal rate: $5,400 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.

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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. 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.