Section 179 Deduction 2026: New $2.5 Million Limit

Section 179 expensing allows businesses to immediately deduct the cost of equipment purchases up to specified limits rather than depreciating assets over many years (IRC §179). For 2026, the maximum Section 179 deduction is $2,560,000 (the baseline $2.5 million plus inflation adjustment), with a phaseout threshold of $4,090,000 (the baseline $4 million plus inflation adjustment). These limits are permanent under the One Big Beautiful Bill Act, increased from the 2024 pre-OBBBA amounts of $1.22 million and $3.05 million respectively. The complete phaseout occurs at $6,650,000 of asset purchases. The higher limits create deductions in the year assets are placed in service. Qualifying property includes tangible personal property with a class life of 20 years or less, such as machinery, equipment, furniture, computers, vehicles (subject to limitations), and leasehold improvements to buildings. Land, buildings, and intangible property do not qualify, though improvements to buildings may qualify under specific rules.

Vehicle purchases involve specific limitations within Section 179. Heavy SUVs and trucks weighing 6,001-14,000 pounds (GVWR) qualify for higher Section 179 deductions under IRC §280F and IRC §168(k). Vehicles are placed in service in the trade or business (not personal use) to qualify. property acquired under a written binding contract before January 20, 2025, does not qualify for Section 179 treatment under OBBBA provisions, only for the depreciation rates that applied previously. The interaction between Section 179 and bonus depreciation works as follows: Section 179 is applied first, then remaining qualified property basis can qualify for 100% bonus depreciation. For example, a business purchasing $3 million in manufacturing equipment can deduct $2.56 million under Section 179 and potentially apply 100% bonus depreciation to the remaining $440,000, fully expensing the entire purchase in 2026.

Strategic planning around Section 179 requires careful consideration of taxable income and phaseout mechanics. The Section 179 deduction cannot exceed your taxable income from the business (or if a business loss is expected, the carryover goes to future years). Therefore, a small business with $500,000 in net income can deduct $500,000 in Section 179 expenses in that year, with any excess (up to the $2.56 million limit) carried forward to future years. The phaseout threshold creates another planning consideration: if your business purchases more than $4.09 million in qualifying assets, the Section 179 deduction is reduced by $1 for every $1 spent above the threshold. For businesses approaching or exceeding the phaseout threshold, timing asset purchases across multiple years or splitting purchases between entities may optimize deductions. Additionally, the interaction with pass-through entity taxation (S-Corps, LLCs, partnerships) matters: each owner's ability to deduct Section 179 amounts depends on their share of business income, making entity structure selection important for asset-heavy businesses planning major capital investments.