Most business purchases have to be recovered slowly. You buy a $90,000 machine, and the Internal Revenue Code normally makes you spread that cost across five or seven years of depreciation. Section 179 breaks that pattern. It lets you elect to expense the full purchase price of qualifying property in the year you place it in service, which moves the tax savings from sometime later to this return.
For tax years beginning in 2026, the Section 179 dollar limit is $2,560,000 and the phase-out threshold is $4,090,000. Both figures come from the inflation adjustments in Revenue Procedure 2025-32, and they sit on top of the permanent increases Congress made in the One Big Beautiful Bill Act. What follows covers the 2026 limits, what counts as qualifying property, the vehicle caps that produce most of the wrong answers, how the election interacts with 100% bonus depreciation, what Arizona does differently, and how the deduction gets reported on Form 4562.
Key Points
- The 2026 dollar limit is $2,560,000. It drops dollar for dollar once you place more than $4,090,000 of Section 179 property in service, and disappears entirely at $6,650,000 of qualifying purchases.
- Section 179 cannot create a loss. The deduction is capped at your aggregate taxable income from the active conduct of a trade or business. Bonus depreciation carries no such cap, which is why the two provisions usually work together instead of competing.
- Heavy SUVs between 6,000 and 14,000 pounds GVWR are capped at $32,000 of Section 179 for 2026. Passenger automobiles under 6,000 pounds fall under Section 280F, which limits total first-year depreciation to $20,300.
- 100% bonus depreciation is now permanent for qualified property acquired and placed in service after January 19, 2025, so basis left over after a capped Section 179 election can often still be written off in full.
- Arizona does not automatically follow the federal number. House Bill 4168 advanced the state's IRC conformity date to January 1, 2026, but corporate and partnership filers still recompute depreciation on the Arizona return, and the state's treatment of the increased Section 179 limitation needs to be confirmed against current Arizona Department of Revenue guidance.
What the Section 179 Deduction Is
Section 179 is an election. Buy tangible personal property for your business and the default rule under Section 168 recovers the cost over the property's recovery period. Section 179 lets you treat all or part of that cost as a current expense in the tax year the property is placed in service.
Three conditions have to be met. The property must be acquired by purchase for use in the active conduct of a trade or business. It must be placed in service, meaning ready and available for its assigned function, during the tax year. And it must be used more than 50% for business purposes. Property that fails the more-than-50% test does not qualify at all, and property that later drops below the threshold triggers recapture of the deduction already taken.
The election runs property by property, with a dollar amount specified for each item. You can expense a full $40,000 asset, expense $10,000 of a $60,000 asset and depreciate the rest, or skip Section 179 on an asset where the later-year deductions are worth more to you. That flexibility is what makes the provision useful for planning.
2026 Section 179 Limits and the Phase-Out
The One Big Beautiful Bill Act, enacted July 4, 2025, amended Section 179(b)(1) to set the maximum expensing amount at $2,500,000 with a $4,000,000 investment threshold for tax years beginning after December 31, 2024. Both figures are indexed for inflation beginning with tax years starting after December 31, 2025.
Applying that indexing, Revenue Procedure 2025-32 sets the 2026 amounts as follows.
The phase-out reduces the limit dollar for dollar rather than by percentage. For 2026, the $2,560,000 limitation is reduced by the amount by which the cost of Section 179 property placed in service during the year exceeds $4,090,000, but not below zero. A business that places $4,600,000 of qualifying property in service in 2026 exceeds the threshold by $510,000, so its ceiling drops to $2,050,000. At $6,650,000 of total qualifying purchases, the ceiling reaches zero.
One detail worth catching: the phase-out counts all Section 179 property placed in service during the year, including property you did not elect to expense. Buying more equipment can therefore reduce the deduction available on the equipment you did elect.
The Taxable Income Limitation
Section 179(b)(3) adds a second ceiling that has nothing to do with how much you spent. Your deduction cannot exceed your aggregate taxable income derived from the active conduct of any trade or business during the year, computed without regard to the Section 179 deduction itself. For a pass-through entity, the limitation applies at both the entity level and the owner level.
Amounts disallowed by the taxable income limitation carry forward indefinitely to later tax years, subject to the dollar limit and income limit in those years. Amounts disallowed by the phase-out are gone permanently. That distinction matters when you are choosing between Section 179 and bonus depreciation on a specific asset.
Qualifying Equipment and Property
The clearest category is tangible personal property used in a trade or business: machinery and production equipment, computers and servers, off-the-shelf computer software, office furniture and fixtures, tools, appliances used in a business, and business vehicles subject to the caps below. Used property qualifies as long as it is new to you and was acquired by purchase rather than by gift, inheritance, or from a related party.
Section 179 also reaches certain real property improvements that would otherwise be recovered over 39 years. Qualified real property, defined in Section 179(f), includes qualified improvement property plus specified improvements to nonresidential real property placed in service after the building was first placed in service:
- Roofs
- Heating, ventilation, and air-conditioning property
- Fire protection and alarm systems
- Security systems
Qualified improvement property means any improvement to the interior of an existing nonresidential building, excluding enlargements of the building, elevators and escalators, and internal structural framework.IRS Publication 946 sets out the full definitions and the exclusions.
What does not qualify: land and land improvements; buildings and their structural components other than the qualified real property listed above; property held merely for the production of income, which covers most rental property in an investor's hands; property used predominantly outside the United States; property acquired from a related party; inherited or gifted property; and property used more than 50% for personal purposes.
Lodging is a special case. Property used in connection with furnishing lodging was generally excluded, but Section 179 now permits the election for property used in furnishing lodging or in connection with furnishing lodging, which opens the door for furniture and appliances in residential rental operations that rise to the level of a trade or business.
Vehicle Rules in Three Tiers
Vehicles produce more wrong numbers than any other category, because three different rule sets apply depending on weight and body style.
Passenger automobiles under 6,000 pounds GVWR. These are luxury autos under Section 280F, and the limitation applies to total first-year depreciation, including any Section 179 amount and any bonus depreciation.Revenue Procedure 2026-15 sets the 2026 Table 1 first-year limit at $20,300 for a vehicle for which bonus depreciation applies, then $19,800 in year two, $11,900 in year three, and $7,160 in each succeeding year. Those figures assume 100% business use and must be reduced proportionally for anything less.
Heavy SUVs from 6,001 to 14,000 pounds GVWR. Section 179(b)(5) caps the Section 179 deduction on a sport utility vehicle at $32,000 for tax years beginning in 2026, up from $31,300 in 2025. The Section 280F luxury auto limits do not apply here, so once the capped $32,000 is taken, the remaining basis can be recovered through bonus depreciation with no ceiling.
Vehicles outside the SUV definition, and vehicles over 14,000 pounds. The $32,000 cap does not apply to a vehicle designed to seat more than nine passengers behind the driver's seat, a vehicle with a cargo area of at least six feet in interior length that is not readily accessible from the passenger compartment, or a vehicle with an integral enclosure fully enclosing the driver compartment and load carrying device with no seating behind the driver and no body section protruding more than 30 inches ahead of the windshield. In practice, most full-size pickups with a standard bed and most cargo vans fall outside the cap, as do trucks above 14,000 pounds GVWR. These vehicles can be expensed up to the full $2,560,000 limit.
For a closer look at the weight test and the vehicles that clear it, see our guide to the 6,000 lb gross vehicle weight tax deduction.
Section 179 and 100% Bonus Depreciation
Section 70301 of the One Big Beautiful Bill Act made the 100% additional first-year depreciation deduction permanent for qualified property acquired and placed in service after January 19, 2025, removing the scheduled phase-down that would have dropped the allowance to 40% for 2025 and to zero after 2026. Property acquired before January 20, 2025 stays on the old phase-down schedule, and a written binding contract entered into before that date fixes the acquisition date for this purpose. IRS Notice 2026-11 provides interim guidance on applying the amended provision.
With both provisions available at full strength, the question is sequencing. Section 179 applies first, then bonus depreciation on the remaining basis, then regular MACRS depreciation on anything left.
Four differences drive the decision:
- Income limitation. Section 179 cannot exceed business taxable income. Bonus depreciation can create or increase a net operating loss.
- Phase-out. Section 179 phases out above $4,090,000 of purchases in 2026. Bonus depreciation has no investment ceiling.
- Selectivity. Section 179 is elected asset by asset and dollar by dollar. Bonus depreciation is elected out by class of property, so it applies to everything in a class unless you opt out of the whole class.
- State conformity. Many states allow some or all of the Section 179 deduction while disallowing bonus depreciation, or the reverse. This is often the deciding factor.
The common pattern: Section 179 goes on assets with the least favorable regular depreciation treatment, such as qualified real property recovered over 39 years, and bonus depreciation absorbs the shorter-lived equipment.
Arizona Conformity
Arizona does not simply adopt whatever the federal figure happens to be. The state operates on a fixed conformity date, and it maintains its own depreciation adjustments in statute.
Governor Hobbs signed House Bill 4168 on June 13, 2026, advancing Arizona's IRC conformity date to the Code as amended and in effect on January 1, 2026, for tax years beginning from and after December 31, 2025. The bill adopts provisions effective during 2025, including retroactive ones, and excludes federal changes enacted after January 1, 2026.
Two Arizona-specific mechanics still apply. Under A.R.S. § 43-1021, certain federal depreciation allowances are added back to Arizona gross income, and A.R.S. § 43-1022 provides the corresponding subtraction for recalculated Arizona depreciation. On the corporate return, Arizona Form 120 Schedule A line A1 adds back total federal depreciation and Schedule B line B1 subtracts recalculated Arizona depreciation. Partnerships make the parallel adjustment on Form 165. Arizona filers in those entity types end up maintaining two depreciation schedules, one federal and one state.
HB 4168 also decouples Arizona from specific OBBBA cost-recovery provisions, including the Section 168(n) allowance for qualified production property, and practitioner analyses of the bill report decoupling from the increased Section 179 dollar limitation for tax years beginning on or after December 31, 2025. The Arizona Department of Revenue has been expected to issue transitional and clarifying guidance following enactment. Because the state figure can differ from the federal one, confirm the current Arizona treatment against ADOR guidance and the applicable year's form instructions before you model a state-level benefit. Modeling the federal deduction and assuming Arizona follows is the single most common error we see on Arizona business returns after a large equipment year.
How to Claim the Section 179 Deduction
The deduction is claimed on Part I of Form 4562, Depreciation and Amortization, attached to your return.
- Confirm the property qualifies and was placed in service during the tax year. Placed in service means ready and available for use, not merely paid for or delivered. Equipment sitting uninstalled in a crate on December 31 does not count.
- Document business use above 50%. Mileage logs for vehicles, usage records for mixed-use equipment. This is the first thing examined on audit.
- Enter the maximum dollar limit on line 1 and total qualifying property cost on line 2. Line 3 carries the threshold, and line 5 computes your reduced ceiling after the phase-out.
- List each elected property on line 6 with its description, cost, and the elected cost. This is where you choose the specific amount per asset.
- Apply the taxable income limitation on line 11, and carry any disallowed amount forward on line 13.
- Complete bonus depreciation and MACRS on the remaining basis in Parts II and III.
- File the election with a timely filed return, including extensions. An election can be revoked, but the revocation is irrevocable.
Pass-through owners will see the deduction reported on Schedule K-1 and apply the dollar and income limitations again at the individual level. That is why an S corporation can pass out a Section 179 amount that a shareholder cannot fully use in the same year.
Planning Considerations for 2026
Timing is the main lever. The deduction turns on the placed-in-service date rather than the purchase or payment date, so a December order that arrives in January belongs to the following year. For the 2026 deduction, the asset needs to be installed and available for use by December 31, 2026.
Financing does not reduce the deduction. Property acquired with debt is eligible for the full Section 179 election on its cost, which means a business can deduct an amount well in excess of the cash it laid out during the year, subject to the income limitation.
Then there are the knock-on effects. A large Section 179 election reduces qualified business income, which reduces the Section 199A deduction. It also reduces basis, which affects gain on a later sale, and disposition of expensed property triggers ordinary income recapture on the recaptured portion instead of capital gain treatment. For real property, a cost segregation study is often the tool that identifies which building components can be moved into shorter recovery periods and made eligible for immediate expenses.
For construction and trade operations, Section 179 is one line item in a much longer list. Our complete 2026 deduction list for contractors covers the rest.
Frequently Asked Questions
What is the maximum Section 179 write-off for 2026?
The ceiling is $2,560,000, per the inflation adjustments in Revenue Procedure 2025-32. It is then reduced by the phase-out and capped again by your business taxable income, so the amount you can claim is often lower.
Does used equipment qualify?
Yes. The property does not have to be new, only new to you. It must be acquired by purchase, which excludes anything received by gift or inheritance, or bought from a related party.
Can the election create a net operating loss?
No. Section 179(b)(3) caps the deduction at your aggregate taxable income from the active conduct of a trade or business, and any amount disallowed for that reason carries forward indefinitely. Bonus depreciation has no such cap, which makes it the better tool in a loss year.
Should I use Section 179 or bonus depreciation?
Usually both. Section 179 applies first, on the assets you select, and bonus depreciation absorbs the remaining basis. Reserve Section 179 for assets with the longest recovery periods, such as qualified real property, and for situations where state conformity favors it.
What vehicles get the full deduction?
Any vehicle outside the sport utility vehicle definition in Section 179(b)(5): pickups with a cargo bed of at least six feet that is not readily accessible from the passenger compartment, cargo vans with no seating behind the driver, vehicles seating more than nine passengers behind the driver's seat, and any vehicle above 14,000 pounds GVWR. Heavy SUVs from 6,001 to 14,000 pounds are capped at $32,000 for 2026, and passenger autos under 6,000 pounds top out at $20,300 in the first year.
Which form do I file, and when is the deadline?
Part I of Form 4562, filed with your return by its due date including extensions. The property has to be placed in service by the last day of the tax year, which is December 31, 2026 for a calendar-year filer.
Does Arizona allow the same amount as the IRS?
Not automatically. Arizona sets its own IRC conformity date, advanced to January 1, 2026 by House Bill 4168, and corporate and partnership filers still reverse the federal figure and substitute a recalculated state amount. Confirm the current-year Arizona treatment against ADOR guidance and the form instructions before assuming the federal number carries over.
What happens if business use drops below 50% later?
The deduction is recaptured. In the year business use falls to 50% or less, you report the excess of the amount expensed over what regular cost recovery would have allowed as ordinary income. Disposing of the property before the end of its recovery period triggers the same treatment.
Talk to a CPA Before the Year Closes
Section 179 rewards planning and punishes hindsight. The dollar limits, the phase-out, the income limitation, the vehicle tiers, the interaction with bonus depreciation, and the Arizona adjustment all interact, and the right answer for one business is the wrong answer for the one next door.
K&R Strategic Partners, a tax planning CPA firm in Mesa, AZ, works with Arizona business owners on exactly this analysis. If you are planning equipment purchases, buying vehicles, or improving a commercial property this year, our strategic tax advisory and preparation team can model the federal and Arizona outcomes before you sign.
Get in touch to review your 2026 position while there is still time to change it.
This article is general information, not tax advice. Dollar amounts and rules described here reflect guidance available as of August 2026 and can change. Consult a qualified tax professional about your specific situation.
