Section 179 Expensing Deduction
Internal Revenue Service
Up to $2.5M deduction
Deduct equipment and software the year you buy it
A federal deduction that allows businesses to immediately expense (deduct in full in the year of purchase) the cost of qualifying equipment, software, and certain improvements rather than depreciating them over years. For 2026, the deduction limit is $2,500,000 (raised by the One Big Beautiful Bill Act signed July 4, 2025), with a phase-out starting when total qualifying purchases exceed $4,000,000. Covers new and used tangible personal property used in a trade or business, off-the-shelf software, and certain qualified improvement property. Unlike bonus depreciation (which also provides first-year deductions), §179 is elected property-by-property and cannot create or increase a net operating loss. Near-universal relevance for any small business buying equipment, vehicles, or software.
- Funding type
- Tax Credit
- Level
- Federal
- Amount range
- $2,500,000
- Realistic amount
- A contractor buying $180,000 in equipment (excavator, trucks) deducts the full $180,000 in year of purchase vs. $18,000–…
- Deadline
- Ongoing — claimed on annual federal income tax return (Form 4562). Deduction limits and phase-out thresholds are inflation-adjusted annually. No expiration — permanent tax provision.
- Status
- active
- States
- Nationwide
- Payment model
- tax offset
Who qualifies
- Eligible property: tangible personal property purchased for use in a trade or business (machinery, equipment, computers, printers, vehicles used >50% for business, tools, manufacturing equipment)
- Off-the-shelf software: commercially available software not custom-developed (eligible since 2003); note that custom software development costs are governed by §174, not §179
- Qualified improvement property (QIP): interior improvements to nonresidential buildings (HVAC improvements, roofing, fire protection, alarm systems, security systems placed in service after the building was placed in service)
- Both new and used property qualify (TCJA removed the 'original use' requirement for bonus depreciation; §179 historically required only business use)
- Property must be placed in service during the tax year — purchased but not yet in use does not qualify
- Business use requirement: if property is also used for personal purposes, only the business-use percentage qualifies. Vehicles require >50% business use; if use drops below 50% in a later year, recapture applies
- The elected §179 deduction cannot exceed the taxpayer's net income from all active trades or businesses (taxable income limitation) — excess carries forward to future years
- Phase-out: the maximum deduction is reduced dollar-for-dollar when total qualifying property placed in service exceeds $4,000,000 (OBBBA 2025 raised phase-out from $3,050,000)
What it covers
Eligible expenses
- Business machinery and equipment (manufacturing equipment, construction equipment, restaurant equipment, medical equipment)
- Computers, servers, and peripherals used in a trade or business
- Off-the-shelf commercial software (e.g., QuickBooks, Microsoft 365, Adobe Creative Cloud — licensed products)
- Business vehicles (trucks, vans, SUVs, cars) to the extent of business use — luxury auto annual caps apply to passenger autos
- Qualified improvement property (interior nonresidential building improvements: HVAC, roofing, fire/alarm/security systems)
- Single-purpose agricultural and horticultural structures
- Storage facilities used in connection with distribution of petroleum and related products
Ineligible expenses
- Real property (land, buildings, building structures) other than QIP
- Property used outside the United States
- Property used for personal purposes (if business use is 50% or less for the year)
- Intangible assets (patents, trademarks, customer lists — those depreciate under §197)
- Air conditioning and heating units (specifically excluded under a TCJA provision — though QIP HVAC improvement of existing units may qualify)
- Property received as a gift or inherited (must be purchased)
- Custom-developed software (governed by §174, not §179)
How to apply
-
1
Identify qualifying property placed in service during the year
List all tangible personal property, software, and QIP placed in service (operational) during the tax year. Confirm each item is used in a trade or business at >50% for assets with mixed personal/business use. Separate from real property (buildings/land), which does not qualify under §179 (except QIP).
~2 hrs
-
2
Check deduction limits and phase-out
Sum total cost of all qualifying property placed in service. If below the phase-out threshold ($4,000,000 per OBBBA 2025), the full $2,500,000 limit is available. If above, reduce the maximum deduction dollar-for-dollar for each dollar above threshold. Verify your business taxable income will accommodate the elected deduction (cannot create NOL).
~1 hrs
-
3
Coordinate §179 election with bonus depreciation (§168(k))
Determine whether to use §179, bonus depreciation, or both. Key distinction: §179 cannot create an NOL (taxable income limitation); bonus depreciation can. §179 can be elected on specific assets while bonus depreciation applies to remaining assets. In 2025, bonus depreciation is 40% (phasing down from 100% TCJA through 2026). For most SMBs with profitable years, §179 first, then bonus on remaining basis, is optimal.
~2 hrs
-
4
Complete Form 4562 and file with return
Part I of IRS Form 4562 covers §179 election. List each elected asset, its cost, and the §179 amount elected. The form also covers bonus depreciation in Part II. File with your federal income tax return (Schedule C, Form 1120, Form 1065, etc.). The election is made on the original return and can be revoked only by amendment before the return due date.
~3 hrs
§179 cannot create a net operating loss — if your business income won't cover the full deduction, the excess carries forward. Bonus depreciation (§168(k)) has no taxable income limit and can create NOLs, making it the better tool in a loss year.
Deadline & timing
§179 is permanent law. The deduction is elected on Form 4562 for the tax year in which qualifying property is placed in service. A §179 election can be revoked on an amended return filed before the return due date (including extensions) — useful if business income later proves insufficient to absorb the full deduction. The taxable income limitation is applied at the partner/shareholder level for pass-throughs, not just at the entity level.
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Last reviewed 2026. GrantCompass is an independent funding-discovery tool and is not affiliated with any government agency. Always confirm details on the official program page.