How Section 179 and Bonus Depreciation Work in 2025 — A Tax Overview for Small Businesses

Understanding how tax deductions work can empower small business owners to make better financial decisions. In 2025, two IRS provisions—Section 179 expensing and bonus depreciation—continue to allow businesses to deduct a substantial portion of the cost of qualified assets in the year they’re placed in service. This article explains how each provision works, what qualifies, and how the updated limits may affect your planning.

What Is Section 179 in 2025?

Section 179 of the IRS Code allows small and midsize businesses to deduct the cost of qualifying equipment and software purchases, rather than depreciating them over several years.

For 2025, the key thresholds are:

Maximum deduction limit: $1,225,000
Phase-out threshold: Begins once total purchases exceed $2,455,000
Complete phase-out: At $3,680,000 in total qualified purchases

These limits are subject to inflation adjustment annually by the IRS.

Qualifying property typically includes:

Machinery and equipment used in business
Business-use vehicles (subject to limitations)
Off-the-shelf computer software
Certain improvements to nonresidential real property (like HVAC systems and security systems)

However, real estate, land, and inventory generally do not qualify under this provision.

How Bonus Depreciation Differs

Bonus depreciation is a separate incentive that lets businesses deduct a percentage of an asset’s cost in the first year—regardless of profitability. In 2025, the bonus depreciation rate is 80%, scheduled to phase down in future years.

Bonus depreciation can apply to both new and used assets (as long as they’re new to the taxpayer) and doesn’t have the same income limitation that Section 179 does. In fact, businesses may use both methods in tandem:

Apply Section 179 up to the allowable limit
Use bonus depreciation for remaining qualifying basis
Use regular MACRS (Modified Accelerated Cost Recovery System) for the balance, if applicable

Key Timing Considerations

To take a deduction in 2025, the asset must be:

Purchased and placed in service during the calendar year (i.e., operational by December 31, 2025)
Backed with records such as invoices, service agreements, or installation proofs

Assets ordered in 2025 but delivered or placed in service in 2026 will not be eligible for 2025 deductions.

For large or long-term capital projects, safe harbor provisions may apply if certain conditions are met, including payment thresholds and expected completion timelines.

What to Keep in Mind

While these tax benefits can be substantial, there are important limitations and conditions:

Vehicles: Special caps apply to passenger vehicles and SUVs, particularly those over 6,000 lbs gross vehicle weight
Mixed-use property: Deductions must be reduced proportionally if an asset is not used 100% for business purposes
Record-keeping: You must maintain a fixed-asset ledger and documentation for every item claimed

Additionally, deductions that exceed the business’s taxable income under Section 179 are not lost—they can be carried forward to future tax years.

Common Misunderstandings to Avoid

Assuming all equipment qualifies: Assets like land or intangible assets (e.g., trademarks) are not eligible
Ignoring “placed in service” requirement: Delivery and readiness matter as much as purchase date
Failing to apply limits correctly: IRS audit adjustments often arise from misuse of vehicle deductions or applying Section 179 to non-eligible items

Consulting an accountant or tax advisor can help verify whether your purchases meet IRS standards and determine the optimal deduction strategy based on your income and future plans.

Example: IRS-Reported Use Case

According to public IRS publications and industry analysis, small contractors often use Section 179 and bonus depreciation to offset the cost of equipment such as trucks, generators, and tools. If a contractor purchases $100,000 worth of eligible equipment in 2025, they may deduct up to the full amount—depending on income and phase-out thresholds.

This upfront deduction can significantly reduce taxable income in a strong revenue year, although it's important to weigh future depreciation benefits as well.

Disclaimer: This article is intended for informational purposes only and does not constitute legal, financial, or tax advice. Readers should consult with a certified tax professional before making decisions related to Section 179 or bonus depreciation.

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