Closely held businesses purchasing equipment, technology, vehicles, or other operational assets in 2026 may qualify for a substantial first-year deduction through 100% bonus depreciation, Section 179, or a combination of both. 

Although both provisions accelerate depreciation, they work differently. The right choice depends on the type of property, the business’s taxable income, owner-level loss limitations, state conformity, and expected income in future years. 

For S corporations, partnerships, LLCs, and other closely held entities, the largest immediate deduction is not always the most valuable. A well-planned approach should also consider cash flow, owner basis, future tax rates, and whether a current-year loss can actually be used. 

What Changed for Bonus Depreciation in 2026? 

Businesses can generally claim 100% bonus depreciation on eligible property acquired after January 19, 2025, and placed in service in 2026. 

The permanent 100% additional first-year depreciation deduction allows eligible businesses to deduct the full qualifying cost in the year the property is placed in service instead of recovering it over several years.  
Under the IRS’s guidance on the permanent 100% additional first-year depreciation deduction, qualifying property acquired after January 19, 2025, may be eligible for immediate expensing. 

Qualifying property generally includes: 

• Machinery and manufacturing equipment 

• Computers, servers, and certain software 

• Office furniture and equipment 

• Tools and operational equipment 

• Certain vehicles 

• Qualified improvement property 

• Other tangible property with a recovery period of 20 years or less 

Certain used property can also qualify when the acquisition meets the applicable requirements. Buildings and most structural components generally do not qualify under the standard rules, although eligible components identified through a cost segregation study may receive accelerated treatment. 

The property must be placed in service, not merely purchased or paid for, during the relevant tax year. For example, a machine delivered in December but not installed and ready for use until January would generally be treated as placed in service the following year. 

How Does Section 179 Work in 2026? 

Section 179 allows a business to elect to expense some or all of the cost of qualifying property in the year it is placed in service, subject to investment and business-income limits. 

For tax years beginning in 2026: 

• The maximum Section 179 deduction is $2,560,000 

• The deduction begins to phase out when qualifying property placed in service exceeds $4,090,000 

• The maximum deduction for certain sport utility vehicles is $32,000  

Common Section 179 property includes: 

• Machinery and business equipment 

• Office furniture 

• Computers and off-the-shelf software 

• Certain business vehicles 

• Manufacturing and production equipment 

• Certain improvements to nonresidential real property 

Eligible nonresidential improvements may include certain roofing, HVAC, fire-protection, alarm, and security systems, subject to the applicable requirements. 

Unlike bonus depreciation, Section 179 is elective and can be allocated among specific assets. A business can choose which property to expense and how much of each asset’s cost to deduct. 

This flexibility can be valuable when the goal is to reduce taxable income to a particular level rather than claim the largest possible current-year deduction. The IRS provides detailed eligibility, limitation, ordering, and recordkeeping rules in Publication 946, How to Depreciate Property. 

Bonus Depreciation vs. Section 179: What Are the Main Differences? 

The provisions overlap, but their limitations and planning implications differ. 

Businesses do not always need to choose only one provision. Section 179 can be applied first, bonus depreciation can then apply to the remaining eligible basis, and regular MACRS depreciation can apply to any basis left over. 

How Does the Business-Income Limitation Affect Section 179? 

Section 179 generally cannot exceed taxable income from the active conduct of a trade or business. 

An amount disallowed because of this limitation may generally be carried forward to a later year. Bonus depreciation is not subject to the same business-income limitation and may create or increase a tax loss. 

Assume a closely held business purchases $700,000 of qualifying equipment but produces only $400,000 of eligible business income. Its current Section 179 deduction may be limited, while bonus depreciation could potentially deduct the full qualifying cost and create a loss. 

However, that loss is not necessarily immediately usable. 

S corporation shareholders and partners may still be affected by: 

• Basis limitations 

• At-risk rules 

• Passive activity loss rules 

• Excess business loss restrictions 

A deduction shown on the entity’s return may therefore be suspended on an owner’s individual return. 

How Does the Section 179 Phaseout Affect Larger Purchases? 

Section 179 becomes less available when a business has a substantial capital-investment program. 

A business placing more than $4,090,000 of qualifying Section 179 property in service during 2026 will begin losing its available deduction dollar for dollar.  

Large equipment purchases can therefore reduce or eventually eliminate the available Section 179 deduction. 

Bonus depreciation does not have the same overall capital-spending phaseout. This may make it more useful for capital-intensive businesses investing heavily in machinery, technology, vehicles, or production equipment. 

Which Option Provides More Control Over the Deduction? 

Section 179 generally provides greater asset-level control. 

A business can expense one asset, partially expense another, and depreciate the remaining property under the regular MACRS rules. 

Bonus depreciation generally applies to all eligible property within a particular asset class unless the taxpayer makes a timely election out for that class. The election out is therefore broader than simply excluding one selected asset. 

Closely held businesses should review the complete fixed-asset schedule before accepting or electing out of bonus depreciation. 

Do the Same Assets Qualify for Both Deductions? 

No. The eligible-property rules overlap, but they are not identical. 

Some property may qualify for Section 179 but not regular bonus depreciation. Certain improvements to nonresidential real property are an important example. 

Conversely, bonus depreciation may remain available when Section 179 is constrained by the business-income limitation or capital-investment phaseout. 

Each asset should be classified separately instead of treating a large capital project as one undivided purchase. 

Do States Follow the Federal Depreciation Rules? 

Not every state follows the federal treatment of bonus depreciation or Section 179. 

Some states conform to the federal rules, while others require businesses to add back part or all of the federal deduction and recover it over a different period. 

A business operating in several states may therefore have: 

• A federal depreciation schedule 

• Separate state addbacks 

• Different state recovery periods 

• Different current-year taxable income in each jurisdiction 

For a multistate closely held business, the deduction should be modelled at both the federal and state levels before the return is filed. 

Why Is the Largest Immediate Deduction Not Always the Best Choice? 

Accelerated depreciation changes when a business receives a deduction; it does not change the economics of the underlying purchase. 

Suppose a profitable company purchases $1 million of qualifying equipment. Deducting the full amount in 2026 may substantially reduce current taxable income, but it also leaves less depreciation available in later years. 

That trade-off deserves careful consideration when: 

• The business expects to be in a higher tax bracket later 

• Current income is already reduced by other deductions or losses 

• Owners may not have enough basis to use a pass-through loss 

• The company expects to sell the asset relatively soon 

• A future sale or transaction may generate significant income 

• The deduction could affect financial ratios used by lenders 

• State addbacks reduce the immediate tax benefit 

A deduction that saves tax at a relatively low rate in 2026 may be less valuable than deductions preserved for a future higher-income year. This is why depreciation decisions should be evaluated as part of a broader tax planning strategy for closely held businesses. 

Business owners must also distinguish taxable income from cash flow. Depreciation can reduce taxable income, but it does not reduce payroll, debt payments, vendor obligations, or the cash required to acquire the asset. Businesses that expect to sell the asset relatively soon should also consider potential depreciation recapture, since accelerated deductions can reduce the asset’s tax basis quickly. 

How Can a Closely Held Business Choose Between the Two? 

The right analysis of bonus depreciation vs. Section 179 should address both the business and its owners. 

What is the business purchasing? 

Prepare a detailed list of assets rather than treating the acquisition as one total project. Machinery, software, vehicles, furniture, building improvements, and structural components may receive different treatment. 

When will each asset be ready for use? 

Ordering or paying for an asset before year-end is not enough. Confirm delivery, installation, testing, licensing, permitting, and operational readiness. 

What Taxable Income Will the Business and Its Owners Report?  

For a pass-through entity, the analysis should include both entity-level and owner-level income. Compensation, distributions, capital gains, retirement contributions, outside investments, and other income may affect the optimal deduction. 

Can the owners currently use a loss? 

Before using bonus depreciation to create a large pass-through loss, review shareholder or partner basis, at-risk amounts, passive participation, and other limitations. 

What is expected in future years? 

A multi-year projection can show whether immediate expensing creates the best overall result or merely shifts valuable deductions away from future higher-income years. A mid-year tax planning review can help identify these issues before year-end decisions are locked in. 

Does the purchase make business sense without the tax benefit? 

Tax savings should support a sound investment—not create one. Equipment that does not improve capacity, efficiency, quality, risk management, or profitability is rarely a good purchase simply because it generates a deduction. 

A Simple Example 

Assume an S corporation expects $1.8 million of taxable income in 2026 and places $900,000 of qualifying machinery in service. 

The company may be able to deduct some or all of the purchase using Section 179, bonus depreciation, or a combination of both. Section 179 can provide greater control over the deduction, while bonus depreciation may be useful when the company wants a larger immediate write-off. 

If the company expects only $250,000 of taxable income, Section 179 may be limited, while bonus depreciation could create a tax loss. Whether the owners can currently use that loss would depend on factors such as basis, at-risk limitations, and their individual tax positions. 

The equipment purchase is the same. The best depreciation strategy changes with the company’s income and the owners’ broader tax objectives. 

The Bottom Line 

For closely held businesses, the choice between bonus depreciation vs. Section 179 depends on more than which provision produces the largest 2026 deduction. Owners should consider taxable income, pass-through limitations, future tax rates, capital-spending levels, state conformity, recapture exposure, cash flow, and the value of preserving deductions for later years.  

Before placing major assets in service, model the federal, state, entity-level, and owner-level consequences of each depreciation method. Glater & Associates, tax planning and compliance services can help evaluate asset eligibility and compare Section 179, bonus depreciation, and regular MACRS treatment as part of a broader tax-planning strategy.