Depreciation vs Expensing: When to Use Section 179 vs MACRS vs Bonus Depreciation

Regular MACRS Depreciation

Under the Modified Accelerated Cost Recovery System (MACRS), the cost of business property is deducted over a recovery period set by its property class. According to IRS Publication 946, examples include:

• 3-year property: tractor units for over-the-road use and qualified rent-to-own property
• 5-year property: automobiles and trucks, computers and peripheral equipment, office machinery such as copiers, and property used in research and experimentation
• 7-year property: office furniture and fixtures, such as desks, files, and safes
• 15-year property: certain improvements made directly to land, such as shrubbery, fences, roads, and sidewalks
• 27.5-year property: residential rental property
• 39-year property: nonresidential real property

For most equipment, the general MACRS method front-loads the deductions, but the cost is still spread over several tax years.

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. According to IRS Publication 946, qualified property includes tangible property depreciated under MACRS with a recovery period of 20 years or less and certain computer software, and it can be new or used property.

Bonus depreciation applies automatically. A taxpayer that does not want it can elect, for any class of property, not to claim it for all property in that class placed in service during the year, by attaching a statement to the return. Bonus depreciation has no dollar cap and is not limited by business income.

Section 179 Expensing

Section 179 allows a taxpayer to elect to expense the cost of qualifying property in the year it is placed in service. For tax years beginning in 2026, the limit is $2,560,000, reduced dollar for dollar when the cost of qualifying property placed in service exceeds $4,090,000. The deduction cannot exceed taxable income from the active conduct of a trade or business, and any excess carries forward. Section 179 can also apply, by election, to certain improvements to nonresidential buildings, such as roofs, HVAC systems, fire protection and alarm systems, and security systems.

An Example

For example, assume a business with $120,000 of business income before depreciation places a $60,000 computer system, which is 5-year property, in service in 2026.

Bonus depreciation: the full $60,000 is deducted in 2026 unless the business elects out for 5-year property.

Section 179: the business can elect to expense the full $60,000, because its business income exceeds the cost.

Regular MACRS: if the business elects out of bonus depreciation and does not elect §179, the $60,000 is deducted over several years, with a much smaller deduction in 2026.

Here, bonus depreciation and §179 produce the same first-year federal result. The differences appear when income is lower, when the business wants to expense only some assets, or when state taxes are considered.

When a Smaller Current Deduction May Make Sense

A larger deduction now is not always better.

Losses. Bonus depreciation can create a net operating loss. Under §172, a net operating loss arising in a tax year beginning after 2017 generally cannot be carried back, except in limited cases such as farming losses, but it can be carried forward indefinitely, and the deduction in a later year is generally limited to 80 percent of taxable income.

Future rates. If the business expects to be in a higher tax bracket in later years, spreading deductions under regular MACRS may be worth more over time.

Recapture on sale. Depreciation, bonus depreciation, and §179 deductions all reduce the property’s basis. When equipment is sold, gain up to the amount of those deductions is generally ordinary income under §1245. For example, if equipment that cost $50,000 was fully deducted and is later sold for $40,000, the entire $40,000 gain is generally ordinary income. If it is sold for $55,000, $50,000 of the gain is generally ordinary income and the remaining $5,000 is treated under the rules for gains on business property.

California Differences

According to the Franchise Tax Board, California does not conform to federal bonus depreciation, and California’s §179 limit is $25,000, reduced when the cost of qualifying property exceeds $200,000. A California business will therefore generally have a different depreciation deduction, and a different basis in its property, for state purposes.

The Bottom Line

For federal purposes in 2026, bonus depreciation and Section 179 both allow most equipment to be deducted in the year it is placed in service, while regular MACRS spreads the deduction out. The best approach depends on the business’s income, whether it wants flexibility asset by asset, its expected future tax rates, plans to sell the property, and the separate California rules.