Small Business Depreciation: Section 179 vs MACRS Explained

You buy a $40,000 work truck. The IRS doesn't let you deduct the full $40,000 from your taxes in the year you bought it. Or rather, sometimes it does. It depends on which depreciation method you use.

Confusing? Yes. Worth understanding? Absolutely. The difference between Section 179 and MACRS can mean thousands of dollars in tax savings, and choosing the wrong one can cost you.

What Is Depreciation, Really?

Depreciation is an accounting concept that says expensive things lose value over time. Your $40,000 truck won't be worth $40,000 in five years. The IRS recognizes this and lets you deduct the loss in value from your taxable income.

Think of it this way: instead of writing off the full cost the day you buy something, you spread the deduction across the useful life of the asset. Per IRS guidelines, a truck might depreciate over 5 years. A building over 39 years. Office furniture over 7 years.

The practical effect is this: depreciation reduces your taxable income, which reduces your tax bill. The question is *how fast* you get to take those deductions.

The Two Main Options

Section 179: The Instant Deduction

Section 179 lets you deduct the full purchase price of qualifying equipment and software in the year you buy it. Instead of spreading $40,000 over five years, you write off all $40,000 this year.

2026 Section 179 Limits (per IRS guidelines):

• Maximum deduction: $1,250,000
• Spending cap (phase-out threshold): $3,130,000
• If you spend more than $3,130,000 on qualifying equipment, the deduction begins to phase out dollar-for-dollar

For most small businesses, these limits are generous enough that they'll never hit the ceiling. You'd need to be buying over a million dollars in equipment in a single year.

What qualifies for Section 179:

• Equipment and machinery
• Computers, printers, and tech hardware
• Office furniture
• Business vehicles (with weight limits for passenger vehicles)
• Software (off-the-shelf)
• Certain building improvements (HVAC, roofing, fire protection, security systems)

What doesn't qualify:

• Real property (buildings and land)
• Inventory
• Property used outside the U.S.
• Property acquired from related parties
• Air conditioning and heating units for residential rental property

The catch: Your Section 179 deduction can't exceed your business's taxable income for the year. If your business earned $30,000 in taxable income, you can only take $30,000 in Section 179 deductions. The remaining amount carries forward to future years.

MACRS: The Gradual Approach

MACRS (Modified Accelerated Cost Recovery System) spreads the deduction over a set number of years based on the type of asset. Per IRS Publication 946, the IRS assigns each type of asset a "recovery period":

MACRS uses an accelerated schedule, meaning you deduct more in the early years and less later. Per IRS Publication 946, for a 5-year asset using the 200% declining balance method, the annual deductions look roughly like this:

• Year 1: 20%
• Year 2: 32%
• Year 3: 19.2%
• Year 4: 11.52%
• Year 5: 11.52%
• Year 6: 5.76%

(Yes, a "5-year" asset actually takes 6 calendar years because of the half-year convention. The IRS assumes you bought the asset in the middle of the first year.)

Unlike Section 179, MACRS deductions are not limited by your taxable income. You can use MACRS deductions to create or increase a net operating loss, which can then be carried forward.

Bonus Depreciation: The Third Option

There's a third method that sits alongside these two: bonus depreciation. This works similarly to Section 179 by allowing you to deduct a large percentage of the asset's cost in the first year.

The phase-down schedule (as established by the Tax Cuts and Jobs Act of 2017):

• 2022 and earlier: 100% (the full cost in year one)
• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and after: 0% (unless Congress extends it)

Per the Tax Cuts and Jobs Act, bonus depreciation is phasing down by 20 percentage points each year. In 2026, you can only deduct 20% of the cost via bonus depreciation, with the rest following the normal MACRS schedule.

Key differences from Section 179:

• Bonus depreciation applies to new *and* used property (as long as it's new to your business)
• No spending cap
• Can create a net operating loss (Section 179 can't)
• Applies automatically unless you elect out

When to Use Section 179

Section 179 is usually the best choice when:

You have enough taxable income. Since the deduction can't exceed your taxable income, Section 179 works best when you have a profitable year and want to reduce your tax bill immediately.

You're buying equipment under the spending cap. For most small businesses spending less than $1,250,000 on equipment in a year, Section 179 offers the fastest write-off.

You want flexibility. With Section 179, you choose how much to deduct. Bought a $50,000 machine? You can deduct $30,000 via Section 179 and depreciate the remaining $20,000 with MACRS. This lets you fine-tune your taxable income.

You're buying a business vehicle. Section 179 has specific limits for passenger vehicles (per IRS guidelines, SUVs over 6,000 lbs GVWR can typically deduct up to around $30,500), but it's still often the fastest way to deduct vehicle costs.

When to Use MACRS

MACRS makes more sense when:

Your taxable income is low or negative. If your business isn't profitable this year, Section 179 won't help because you can't deduct more than your taxable income. MACRS deductions have no such limit and can actually create or increase a loss that carries forward.

You're depreciating real property. Buildings and structural components must use MACRS. Section 179 only covers certain improvements, not the building itself.

You want predictable deductions over time. Some businesses prefer spreading deductions across multiple years for steadier financial statements. If you're seeking a bank loan, showing consistent profitability across years can matter more than maximizing deductions in one year.

You've exceeded the Section 179 spending cap. If you're spending over $3,130,000 on equipment in a year, the Section 179 deduction phases out and MACRS becomes your main option.

A Side-by-Side Comparison

Let's say you buy a $60,000 piece of equipment in 2026 and your business has $80,000 in taxable income before depreciation.

Option A: Full Section 179

• Year 1 deduction: $60,000
• Taxable income after deduction: $20,000
• Tax savings in year 1 (at 24% bracket): $14,400
• Remaining deductions in future years: $0

Option B: MACRS Only (5-year property)

• Year 1 deduction: $12,000 (20%)
• Year 2: $19,200 (32%)
• Year 3: $11,520 (19.2%)
• Year 4: $6,912 (11.52%)
• Year 5: $6,912 (11.52%)
• Year 6: $3,456 (5.76%)
• Tax savings in year 1 (at 24%): $2,880

Option C: Section 179 + MACRS Split

• Section 179 on $40,000, MACRS on remaining $20,000
• Year 1 deduction: $40,000 + $4,000 (20% of $20K) = $44,000
• Taxable income after deduction: $36,000
• Tax savings in year 1: $10,560
• Remaining $16,000 depreciates over years 2-6

Option A gives you the biggest immediate tax break, but it also drops your taxable income to $20,000. If you were counting on showing higher income for a loan application, Option C might be the better play.

Common Depreciation Mistakes

Taking Section 179 on an asset you don't use enough for business. Per IRS rules, if you use an asset less than 50% for business, you can't use Section 179 on it. That truck you drive to job sites but also use on weekends? You'd need to document business use percentage.

Forgetting the half-year convention. Under MACRS, you only get half a year's depreciation in the year you place the asset in service, regardless of when you bought it. Buy a machine in January, you still only get half a year.

Not electing out of bonus depreciation when it helps. Sometimes you *don't* want the extra first-year deduction. If you expect to be in a higher tax bracket next year, it might make sense to spread the deduction out. You can elect out of bonus depreciation on a class-by-class basis.

Depreciating land. Land doesn't depreciate. Ever. If you buy a property for $200,000, the IRS requires allocating the purchase price between the building and the land, and only the building portion can be depreciated.

The Bottom Line

For many small businesses buying equipment, Section 179 tends to be the go-to choice. It gives you the biggest deduction in year one, and the limits are high enough that they won't affect the vast majority of businesses.

Use MACRS when you're dealing with real property, when your income is too low to use Section 179 fully, or when you strategically want to spread deductions across years.

And it's worth keeping an eye on the bonus depreciation phase-down. At only 20% for 2026, it's far less useful than it was a few years ago, but it still provides a small boost on top of MACRS.

Run the Numbers for Your Situation

Every business is different, and the right depreciation strategy depends on your income, tax bracket, and future plans. Our free Depreciation Calculator lets you compare Section 179, MACRS, and bonus depreciation side by side with your actual numbers. See exactly how much you'll save in year one and over the full life of the asset.

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*This article is for informational purposes only and does not constitute financial, legal, or tax advice. Consult a qualified professional for advice specific to your situation.*

FAQ

What is the difference between Section 179 and MACRS depreciation?

Section 179 lets you deduct the full purchase price of qualifying equipment in the year you buy it, up to $1,250,000 for 2026. MACRS spreads the deduction over multiple years based on the asset type, such as 5 years for computers and vehicles or 7 years for office furniture. Section 179 gives a bigger immediate tax break, while MACRS provides deductions over time.

Can I use both Section 179 and MACRS on the same asset?

Yes. You can deduct part of the cost using Section 179 and depreciate the remaining balance using MACRS. This split approach is useful when you want to reduce your taxable income in year one without dropping it too low, for example if you need to show higher income for a loan application.

What is the Section 179 deduction limit for 2026?

The maximum Section 179 deduction for 2026 is $1,250,000, with a spending cap of $3,130,000. If your total qualifying equipment purchases exceed the spending cap, the deduction phases out dollar for dollar. Most small businesses will never hit these limits.

What is bonus depreciation and how much is it in 2026?

Bonus depreciation allows you to deduct a percentage of an asset's cost in the first year on top of regular MACRS depreciation. For 2026, it is 20 percent, down from 100 percent in 2022. It is phasing down by 20 percentage points each year under the Tax Cuts and Jobs Act and will reach zero in 2027 unless Congress extends it.

Can Section 179 create a business loss?

No. Your Section 179 deduction cannot exceed your business's taxable income for the year. If your taxable income is $30,000, you can only take $30,000 in Section 179 deductions, with the unused amount carrying forward. MACRS and bonus depreciation, by contrast, can create or increase a net operating loss.