Section 179 Deduction in 2026: Equipment Expensing Rules and Limits

How Section 179 Works

The cost of business equipment is normally recovered through depreciation. Under the Modified Accelerated Cost Recovery System (MACRS), for example, computers and peripheral equipment are 5-year property, so their cost is deducted over several tax years. Section 179 allows a taxpayer to elect to treat all or part of the cost of qualifying property as an expense in the year the property is placed in service. The election is made on Form 4562.

The 2026 Limits

The One Big Beautiful Bill Act increased the statutory limit to $2,500,000 and the phase-out threshold to $4,000,000 for property placed in service in tax years beginning after 2024, with both amounts adjusted for inflation. For tax years beginning in 2026, the IRS set the limit at $2,560,000 and the threshold at $4,090,000 (Rev. Proc. 2025-32; IRS Publication 946).

The limit is reduced dollar for dollar by the amount by which the cost of §179 property placed in service during the year exceeds the threshold. For example, a business that places $4,300,000 of qualifying property in service in 2026 exceeds the threshold by $210,000, so its §179 limit is $2,350,000 ($2,560,000 minus $210,000).

A separate limit applies to certain sport utility vehicles. For tax years beginning in 2026, the cost of such a vehicle that can be taken into account under §179 is limited to $32,000. Passenger automobiles are also subject to annual depreciation limits, and a vehicle must be used more than 50 percent for business to qualify for §179 at all.

The Business Income Limitation

The §179 deduction cannot exceed the taxpayer’s aggregate taxable income from the active conduct of any trade or business for the year, computed without regard to the §179 deduction (§179(b)(3)). Any amount disallowed by this limit carries forward to later years.

For example, if a sole proprietor’s business taxable income is $80,000 and the proprietor elects to expense $100,000 of qualifying equipment, the current deduction is limited to $80,000, and the remaining $20,000 carries forward. Section 179 therefore cannot be used to create a loss. Bonus depreciation, discussed below, is not subject to this limitation.

What Property Qualifies

Under §179(d), qualifying property generally includes tangible depreciable personal property, such as machinery, equipment, furniture, and vehicles (subject to the limits above), and off-the-shelf computer software. At the taxpayer’s election, it also includes “qualified real property”: qualified improvement property, and roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on nonresidential real property after the building was first placed in service.

The property must be acquired by purchase for use in the active conduct of a trade or business. Property acquired from certain related persons or from a member of the same controlled group does not qualify. Land and buildings, other than qualified real property, do not qualify.

Section 179 and Bonus Depreciation

The One Big Beautiful Bill Act reinstated a 100 percent special depreciation allowance, commonly called bonus depreciation, for qualified property acquired and placed in service after January 19, 2025. Bonus depreciation applies automatically unless the taxpayer elects out for a class of property, it has no dollar cap, and it is not limited by business income.

With 100 percent bonus depreciation available, §179 remains useful in several situations: for property that does not qualify for bonus depreciation, such as certain improvements to nonresidential buildings that qualify as §179 qualified real property; where a taxpayer wants to choose asset by asset how much to expense; and in coordinating federal and state results.

Recapture

Section 179 deductions can be recaptured in two ways. If business use of the property drops to 50 percent or less in a later year during its recovery period, the excess of the §179 deduction over the depreciation that would otherwise have been allowed is generally included in income as ordinary income. And when the property is sold, the §179 deduction is treated like depreciation, so gain up to the amount previously deducted is generally ordinary income under the §1245 recapture rules.

For example, if equipment costing $50,000 was fully expensed under §179, its basis is zero. A later sale for $30,000 produces $30,000 of gain, which is generally ordinary income.

California Differences

California has not adopted the federal amounts. According to the Franchise Tax Board, the maximum California §179 deduction is $25,000, reduced when the cost of §179 property placed in service exceeds $200,000, and California does not conform to federal bonus depreciation. A business that expenses equipment for federal purposes will generally have a different depreciation deduction, and a different basis in the property, for California purposes.

The Bottom Line

For 2026, Section 179 allows qualifying businesses to expense up to $2,560,000 of qualifying property, subject to the phase-out, the business income limitation, and special rules for vehicles. Because 100 percent bonus depreciation is also available, the best approach usually depends on the type of property, the business’s income, and the separate California rules.