Bonus Depreciation vs Section 179: Which Is Better for Business Owners After OBBBA

Overview

Business owners frequently hear that equipment purchases can be written off immediately. While that is often true, the method used matters significantly. Bonus depreciation under Internal Revenue Code Section 168(k) and expensing under Section 179 both accelerate deductions, but they operate very differently and produce very different tax outcomes. After the One Big Beautiful Bill Act, the choice between these two methods has become a core planning decision affecting cash flow, losses, state taxes, and long term flexibility.

Key Differences at a Glance

• Bonus depreciation applies automatically unless a business elects out.
• Section 179 requires an affirmative election each year.
• Bonus depreciation can create tax losses.
• Section 179 is limited to taxable income.
• California does not conform to bonus depreciation.
• California partially conforms to Section 179 with much lower limits.

What Changed Under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property placed in service after December 31, 2024. It also permanently increased the Section 179 expensing limit and the investment phaseout threshold, while expanding the types of property that qualify. These changes replaced the prior scheduled phase downs and removed much of the uncertainty surrounding capital investment planning.

When Bonus Depreciation Makes Sense

Bonus depreciation is most effective when a business wants maximum deduction acceleration. There is no income limitation, which means the full cost of qualifying property can be deducted even if it creates a net operating loss.

Example. A manufacturing LLC places $2,000,000 of used equipment in service during 2025 but expects only $500,000 of taxable income. Section 179 would be limited to the amount of taxable income. Bonus depreciation allows the entire $2,000,000, creating a loss that may be carried forward.

This approach is common for capital intensive businesses or companies with volatile earnings. However, it requires careful planning because California requires a full addback of bonus depreciation, which can significantly increase state taxable income in the year of purchase.

When Section 179 Is the Better Tool

Section 179 is a precision tool. The deduction is limited to taxable income, which prevents the creation of losses and gives business owners more control over timing. This is often preferable for pass through entities where owners want to avoid unusable losses or basis complications.

Example. An S corporation earns $970,000 of taxable income and purchases $700,000 of qualifying equipment. A Section 179 election allows the deduction to fully offset income without creating a loss. Any remaining basis is depreciated normally in future years.

Section 179 is especially valuable for California taxpayers because the state allows limited conformity. While California caps the deduction at a much lower amount, the resulting addback is usually far smaller than the addback required for bonus depreciation.

California Tax Impact

California does not conform to federal bonus depreciation. Any bonus depreciation claimed on the federal return must be added back on the California return, with the difference recovered slowly over time. This creates timing differences and frequently accelerates California tax liability.

California partially conforms to Section 179, but with a fixed deduction cap and lower phaseout threshold. Amounts exceeding the California limit must be added back and depreciated over California recovery periods. Even with these limitations, Section 179 is generally the preferred choice when California tax matters.

Using Both Together

In practice, the optimal strategy often involves combining both methods. Section 179 can be used to fine tune taxable income, while bonus depreciation absorbs remaining basis when additional acceleration is appropriate. The decision should always be modeled with attention to loss limitations, owner basis rules, and state tax exposure.

Mid year planning is critical. Many costly mistakes occur when depreciation elections are made without modeling their interaction with other business deductions and owner level limits. Schedule a Consultation to evaluate the impact before returns are filed.

Final Takeaway

Bonus depreciation is the dominant tool for maximum federal deduction acceleration, but it often increases California taxes in the short term. Section 179 provides greater control and better state alignment, but it is constrained by income limits. The most effective approach balances both methods based on cash flow, growth plans, and state tax exposure.

See current federal rates on the Economic Dashboard .