By Allen Buckley, CFP®, Founder & Managing Partner, Paragon Private Wealth Management
For 2026, a business can generally deduct the full cost of qualifying equipment, software and other property in the year it is placed in service, as long as the property was acquired after January 19, 2025. The 2025 federal tax law (P.L. 119-21, commonly called the One Big Beautiful Bill Act) restored 100% bonus depreciation. Section 179 is a separate option with its own 2026 limit of $2,560,000. Whether either one fits depends on your income, your plans for the asset, and your state.
Key takeaways
- The 100% rate applies to qualified property acquired and placed in service after January 19, 2025. The law sets no end date.
- What qualifies: generally, property with a MACRS recovery period of 20 years or less, certain software, and a few other categories. New and certain used property can qualify.
- Section 179 for 2026: up to $2,560,000, reduced dollar for dollar once qualifying purchases for the year pass $4,090,000, and limited to your business taxable income.
- Timing: the asset has to be placed in service (ready and available for use) by the end of your tax year, which is December 31 for calendar-year businesses.
- States differ: California does not follow federal bonus depreciation, and Tennessee's excise tax allows only 20% for qualifying 2026 assets.
- Selling later: on equipment, depreciation you deducted is generally taxed as ordinary income if you sell at a gain.
What bonus depreciation is
Most business assets are written off over several years under the IRS system called MACRS. A computer is generally 5-year property; office furniture is generally 7-year property. Bonus depreciation, which the IRS calls the special depreciation allowance, lets you deduct a percentage of the cost in the first year instead. Whatever basis is left is depreciated under the regular rules.
Bonus depreciation applies automatically unless you elect out. The election out is made by class of property (all of your 5-year property placed in service that year, for example), not asset by asset, and you can't revoke it later without IRS consent.
The current rule: 100% for property acquired after January 19, 2025
Under the 2017 tax law, bonus depreciation had been phasing down by 20 percentage points a year and was 40% for most property placed in service in 2025. P.L. 119-21, signed July 4, 2025, changed that. Section 70301 of the law set the rate at 100% for qualified property acquired after January 19, 2025, and removed the old placed-in-service deadlines.
The acquisition date matters more than delivery. In Notice 2026-11, released January 14, 2026, the IRS said taxpayers can generally follow the existing bonus depreciation regulations, using January 19, 2025 as the new cutoff. Under those rules, property bought under a written binding contract is generally treated as acquired when the contract was entered into (or later, if it has cancellation periods or contingencies). Equipment under a binding contract signed before January 20, 2025 generally stays under the old phase-down percentage, even if it arrived later.
A few other pieces of the new law:
- Transition election. For your first tax year ending after January 19, 2025 (2025 for calendar-year businesses), you could elect 40% instead of 100%, or 60% for certain long-production property and aircraft.
- Qualified production property. A separate election under IRC section 168(n) allows a 100% first-year deduction for certain nonresidential buildings used in manufacturing, production or refining. Construction must begin after January 19, 2025 and before January 1, 2029, and the building must be placed in service after July 4, 2025 and before January 1, 2031. Offices and space for storing finished goods generally don't count, and the deduction can be recaptured if production use stops within 10 years (IRS Notice 2026-16).
Section 179 vs bonus depreciation
Both speed up the deduction. They work differently.
| Bonus depreciation | Section 179 | |
|---|---|---|
| How you claim it | Applies automatically unless you elect out for a class of property | You elect it and choose which assets, and how much of each |
| 2026 dollar limit | No annual dollar limit | $2,560,000, reduced once qualifying purchases pass $4,090,000 |
| Income limit | Not subject to the Section 179 business income limit | Limited to taxable income from the active conduct of a business; the excess carries forward |
| Building improvements | Qualified improvement property (15-year property) can qualify | You can elect to include qualified improvement property, plus roofs, HVAC, fire protection and alarm systems, and security systems on nonresidential buildings |
| Business use | Listed property, such as many vehicles, must be used more than 50% for business | Property must be used more than 50% for business in the year it is placed in service |
For sport utility vehicles, the Section 179 portion is capped at $32,000 for tax years beginning in 2026, and separate passenger automobile limits can apply.
In practice, the choice often comes down to control and income. Section 179 lets you pick an exact amount, which can help if you want to deduct only part of a purchase or if your state treats the two differently. Bonus depreciation has no dollar cap and isn't tied to business income. A business can use both, or regular depreciation for some assets. The right mix depends on your current and expected tax brackets, your entity type and your state, so it's a decision to make with your tax professional.
Placed in service by December 31
The deduction belongs to the year the asset is placed in service, not the year you order or pay for it. The IRS defines that as the date the property is ready and available for a specific use, even if you haven't started using it. Equipment ordered in November that arrives and is set up in January is generally a next-year deduction for a calendar-year business. If your business uses a fiscal year, your year-end is the deadline.
A deduction lowers taxable income. It doesn't make a purchase free, so the business case for the asset still comes first.
Many states don't follow the federal rule
States decide for themselves whether to follow federal depreciation rules, so your state deduction can look very different. California, home to our Modesto office, has not conformed to federal bonus depreciation, and its Section 179 limit is $25,000, reduced once purchases pass $200,000 (Franchise Tax Board, 2025 instructions). Check your own state's rules.
A note for Tennessee business owners
Tennessee's franchise and excise tax does not follow the 100% federal rate. The difference shows up in the excise tax, which is based on net earnings. The Tennessee Department of Revenue says that for assets purchased on or after January 1, 2023, Tennessee follows bonus depreciation as it existed under the 2017 federal law. For excise tax purposes, that means 40% for 2025 assets, 20% for qualifying assets purchased and placed in service in 2026, and 0% for 2027 and later. Federal bonus depreciation above those amounts is added back on Schedule J and depreciated under regular MACRS, and the qualified production property deduction isn't allowed. Section 179 does follow the federal rules, including the higher limits. The Department notes this will stay the same unless the legislature passes conforming legislation. Our guide to small business taxes in Tennessee covers the franchise and excise tax more broadly.
Recapture when you sell
A fast write-off lowers the asset's basis, which matters when you sell. For equipment and other section 1245 property, gain is treated as ordinary income up to the depreciation allowed or allowable, which includes bonus depreciation and Section 179. Only gain above that amount is section 1231 gain, which may be treated as capital gain depending on your other section 1231 transactions that year.
A hypothetical: a business buys a $100,000 machine, deducts all of it through bonus depreciation, and sells it a few years later for $60,000. Its adjusted basis is $0, so the full $60,000 gain is generally ordinary income.
If you used Section 179 and business use drops to 50% or less during the recovery period, part of the deduction can be recaptured even without a sale. Real property follows different (section 1250) rules. If you may sell the whole business, how the price is allocated among assets matters too; see our tax planning guide for selling your business.
Frequently asked questions
Is 100% bonus depreciation permanent? The 2025 law has no end date for the 100% rate. Congress can still change the law.
What is the Section 179 limit for 2026? $2,560,000 for tax years beginning in 2026, reduced dollar for dollar once qualifying property placed in service passes $4,090,000. The Section 179 amount for a sport utility vehicle is capped at $32,000.
Can used equipment qualify for bonus depreciation? Yes. Certain used property can qualify, subject to the IRS rules on how the property was acquired.
Do I have to take bonus depreciation? No. You can elect out for any class of property with a statement attached to your return. You can't revoke that election without IRS consent.
Does Tennessee allow 100% bonus depreciation? Not for the excise tax. For assets purchased on or after January 1, 2023, Tennessee follows the 2017 federal schedule: 20% for 2026 and 0% for 2027 and later, unless the legislature changes it.
Talk it through with Allen
Large purchases, entity choices and an eventual sale all connect. Paragon Private Wealth Management works alongside Paragon Tax, so we can look at the investment and tax sides of a decision together. If you'd like to talk through what bonus depreciation could mean for your business, contact Allen. We work with families across the country from our offices in Franklin, Tennessee and Modesto, California.
Paragon Private Wealth Management is a financial services group offering investment advisory services through Savvy Advisors, Inc. ("Savvy"). Savvy is an investment advisor registered with the Securities and Exchange Commission ("SEC"). Paragon Private Wealth Management is not a separately registered investment advisor.