By SBE Council at 19 August, 2025, 11:27 am
By Barbara Weltman –
The One Big Beautiful Bill Act (OBBBA) included several incentives to drive business investments in equipment, machinery, and plants. Investments in equipment and software in the second half of 2025 is expected to grow by 6.3% in part due to passage of OBBBA and its tax incentives. One of them is 100% bonus depreciation, which is a full deduction for the cost of eligible property in the year it’s placed in service. But there’s another first-year write-off for eligible purchases: the Section 179 deduction. Why the two options, how do they differ, and what it means to you?
State Income Tax Rules are Paramount
Bonus depreciation is a great option, as it has no dollar limit and can even be used to create or increase a net operating loss (you don’t have to be profitable to take the deduction). But bonus depreciation may not be a viable option for all businesses because of state income tax rules. Some states don’t conform to the federal bonus depreciation rule.
A number of states have decoupled from federal income tax rules. As noted, this means they don’t follow federal income tax rules when it comes to bonus depreciation. So, if bonus depreciation is claimed at the federal level, the deduction is added back at the state level, with regular depreciation accounting for write-offs on this property. Getting into state income tax weeds can mean even subtler differences (e.g., Mississippi allows full bonus depreciation only for certain business assets).
Because of this, bonus depreciation isn’t always a good option. Consider the Section 179 deduction, although some states limit the deduction. Still, many small businesses can benefit immediately – in 2025 – from the new tax deduction enhancements.
Section 179 Deduction Enhancements
Typically referred to as first-year expensing, the Section 179 deduction allows for a full write-off of the cost of eligible property up to set limits. Due to changes in OBBBA, the full deduction applies to total purchases up to $2.5 million in 2025. The change in OBBA doubled the $1.25 million limit.
When total purchases for the year exceed $4 million, the $2.5 million phases down dollar for dollar, so that no deduction can be claimed once total purchases placed in service in 2025 exceed $6.5 million. These dollar limits will be indexed for inflation starting in 2026.
Limitations. Certain limitations may curtail or prevent first-year expensing:
● Eligible property. The property must fit within certain categories and be used in the U.S.: tangible personal property (machinery and equipment); off-the-shelf software; qualified improvement property for commercial buildings (other than elevators, escalators, structural framework, and building enlargements); and HVACs, roofs, fire, alarm, and security systems.
● Taxable income limit. The deduction cannot exceed taxable income from an active trade or business. This means it can’t be used to create or increase a net operating loss. However, any excess amounts can be carried forward indefinitely and used in future years (subject to the same limits). For partners and S corporation shareholders, the taxable limit applies for them as well as their entities.
● 50% business use requirement. The property must be used more than 50% for business. If property has been expensed but business use later drops to 50% or less, the deduction must be recaptured.
● Special limit on vehicles. SUVs over 6,000 pounds (but under 14,000 pounds) can use first-year expensing, but only up to a dollar limit ($31,300 in 2025).
● No related party seller. The property must be acquired in an arm’s length transaction and not from a related party (e.g., certain family member, corporation with shared ownership).
● Proper election. The deduction isn’t automatic; it must be elected on a timely-filed return. For partnerships and S corporations, the entity makes the election; not the individual owners. An amended return can be used to make an election only if it’s filed by the due date, including extensions. Once made, the election generally is irrevocable. But you don’t need IRS permission to revoke the election or change the property subject to the election if an amended return is filed before the statute of limitations expires (generally three years from the filing date).
State Income Tax Rules for the Section 179 Deduction
Again, bonus depreciation is not the only deduction subject to special treatment at the state level. More than a dozen states limit first-year expensing to a lower dollar limit (e.g., California caps the deduction in 2025 at $25,000).
Conclusion
If you buy equipment or other eligible property now, you’re likely to be able to deduct the entire purchase price on your 2025 return, depending on how much you buy and where you’re located. But keep certain things in mind:
● Pass-through entities. Partners and S corporation shareholders apply the dollar limit on their personal returns. Owners in these businesses need to coordinate what the business elects so that owners can optimize deductions. If they have multiple businesses and each uses the Section 179 deduction, owners may not be able to fully utilize the amounts passed through to them.
For example, say a partnership buys $2.5 million of equipment in 2025 and passes $1.25 million to its 50% partner. That partner is also an 80% shareholder in an S corporation that also buys $2.5 million in equipment and passes through $2 million to same person. Of the total $3.25 million passed through to this business owner, only $2.5 million can be deducted in 2025, assuming sufficient taxable income. The excess $750,000 can be carried forward.
● Financing. The deduction is determined without regard to any financing. This means the deduction can be used secure needed equipment while boosting cash flow. For example, say a business buys $1 million in equipment, financing three-quarters of the price. The deduction is $1 million, but the business only dented its cash flow by $250,000.
Bottom line: Determine what equipment or other property your business needs. Then work with a knowledgeable tax pro to help determine the best way to write-off purchases now.
Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Smooth Failing, and Home Business Magazine’s Home-Based Business Guide. Follow Barbara on X@BigIdeas4SB.
