Section 179 vs. Bonus Depreciation: Which Equipment Write-Off Strategy Saves Contractors More?
- Cost Construction Accounting
- 2 days ago
- 5 min read
You're about to make a major equipment purchase. Your accountant mentions "Section 179" and "bonus depreciation." You nod along, but honestly, you have no idea which saves you more money.
Here's what makes this decision even more important now: Recent tax legislation doubled Section 179 limits and permanently restored 100% bonus depreciation. This is the most contractor-friendly equipment depreciation landscape in modern history.
Let's break down Section 179 vs. bonus depreciation with current rules and show you real construction examples of what this means for your bottom line.
What Is Section 179 and Bonus Depreciation?
Section 179Â allows you to deduct the full purchase price of qualifying equipment in the year you buy it, rather than spreading the deduction over several years. Recent tax legislation doubled the limits: $2.5 million maximum deduction, with phase-out beginning at $4 million in total purchases (complete phase-out at $6.5 million). Equipment must be placed in service by December 31st.
Bonus Depreciation allows you to deduct a percentage of qualifying property in the first year, with no dollar limit. Recent tax legislation permanently restored 100% bonus depreciation for property acquired after a recent effective date. Property acquired before that date follows the old phase-down schedule with lower percentages.
What qualifies for both:Â Construction equipment (excavators, loaders, dozers, skid steers, cranes), work trucks meeting weight requirements, trailers, office furniture, computers, software, and certain building improvements. Both new AND used equipment qualify.
The key difference:Â Section 179 lets you pick and choose which assets to expense, while bonus depreciation is all-or-nothing for each asset class. Section 179 can't exceed business income, while bonus depreciation can create a loss.
Head-to-Head Comparison
Feature | Section 179 | Bonus Depreciation |
Maximum Deduction | $2.5M | No limit |
Flexibility | Pick and choose | All-or-nothing |
Income Limitation | Can't exceed business income | Can create a loss |
Used Equipment | Yes | Yes |
Current Rate | 100% (up to limit) | 100% (after effective date) |
Phase-out | Begins at $4M purchases | None |
Real Construction Scenarios: Which Strategy Wins?
1. Single Equipment Purchase
Mike's Excavation buys a $250,000 excavator with net income of $600,000.
Using Section 179: Deduct full $250,000 immediately → Tax savings (35% bracket): $87,500
Using Bonus Depreciation: Deduct 100% = $250,000 (if acquired after effective date) → Tax savings (35% bracket): $87,500
Winner: TIE. Both provide full immediate deduction under current rules. For single purchases under $2.5M, both strategies now provide the same 100% benefit, a dramatic change from years past.
2. Large Fleet Expansion
Sarah's Grading Company purchases $5 million in equipment with net income of $2 million.
Strategy: Section 179 + Bonus Depreciation
Section 179: $2,500,000 (maximum)
Bonus depreciation (100% of remaining $2,500,000): $2,500,000
Total first-year deduction: $5,000,000
Tax savings (35% bracket): $1,750,000
Using only Section 179:Â Deduction limited to $2,500,000, with remaining $2,500,000 depreciating over time. Year-one tax savings: $875,000.
Difference: $875,000 in lost first-year savings
Winner: Combined strategy is critical for large purchases
3. Low Income Year
Tom's Concrete buys $150,000 in equipment with net income of only $80,000.
Using Section 179:Â Limited to business income of $80,000, with remaining $70,000 carrying forward.
Using Bonus Depreciation:Â Can take 100% = $150,000 (full deduction), with no income limitation, creating a net operating loss.
Winner: Bonus depreciation provides full benefit without income restrictions.
4. Multi-State Operations
Lisa's Construction operates in California and Arizona, purchasing $1.5 million in equipment.
Federal benefit is similar for both strategies, but some states don't conform to federal bonus depreciation rates while most states conform to Section 179. Bonus depreciation can create state tax adjustments and complexity.
Winner: Section 179Â often avoids state conformity complications. Always check your state's conformity rules.
When to Use Each Strategy
Use Section 179 when:
Equipment purchases are under $2.5 million
You have sufficient business income to absorb the deduction
You want flexibility to pick specific assets
You're buying building improvements (HVAC, roofs, security)
Your state doesn't conform to bonus depreciation
Use Bonus Depreciation when:
Equipment purchases exceed $4 million (Section 179 phases out)
You want to create a tax loss (no income limitation)
You're making massive investments beyond Section 179 limits
You have low or negative income this year
You're buying all similar asset classes
The Winning Strategy: Use Both
The optimal approach combines both strategies: Apply Section 179 first (up to $2.5 million), then apply 100% bonus depreciation to remaining cost.
Result: Potentially 100% immediate deduction on substantial purchases.
Example:Â Purchase $4 million in equipment with business income of $2.5 million.
Section 179: $2,500,000
Bonus (100% of remaining $1.5M): $1,500,000
Total first-year deduction: $4,000,000
Tax savings (35%): $1,400,000
Compare to previous rules before recent legislation: Section 179 was limited to $1,220,000 with lower bonus percentages, providing significantly less in first-year deductions. Current rules provide hundreds of thousands more in tax savings.
Common Mistakes to Avoid
Not placing equipment in service by year-end:Â Equipment must be purchased and placed in service (ready for use) by December 31st. You can't claim it if it's sitting at a dealer lot waiting for January delivery.
Taking Section 179 without income:Â If your business has low income or a loss, Section 179 just carries forward. Use 100% bonus depreciation instead, it has no income limitation.
Not verifying bonus depreciation effective date:Â Property acquired before the recent effective date may only qualify for lower bonus percentages. Document your acquisition dates carefully.
Ignoring state tax rules:Â Some states (especially California) don't conform to federal bonus depreciation, creating add-backs on state returns and higher state taxes. Always consult your CPA about state-specific rules.
Required Documentation
Keep these records for Section 179 or bonus depreciation: purchase invoices and agreements, proof of payment (checks, bank statements), placed-in-service proof (delivery receipts, installation records), acquisition date documentation (critical for proving timing), business use records (mileage logs, job logs), and Form 4562 (Depreciation and Amortization).
Pro tip:Â Documentation proving acquisition timing is critical for claiming proper bonus depreciation rates.
Does Financing Still Work?
Yes. Both provisions work whether you pay cash or finance. You get the full deduction based on purchase price, even making payments.
Example:Â Purchase $300,000 excavator with $50,000 down and finance $250,000. You still deduct full $300,000 under Section 179 or bonus. This is powerful: full tax benefit upfront while spreading payments over time.
Your Equipment Purchase Checklist
Before any major equipment purchase:
Verify Current Benefits:
Is this equipment eligible for Section 179?
Does it qualify for 100% bonus depreciation?
Was it acquired after the effective date?
Calculate Your Strategy:
Total equipment spending for the year?
Business income sufficient for Section 179?
Would combined strategy maximize benefits?
Check Compliance:
State conformity to federal bonus depreciation?
Can equipment be placed in service by December 31?
Proper documentation in place?
The Bottom Line
Recent tax legislation fundamentally transformed equipment depreciation for construction companies: Section 179 doubled to $2.5 million and bonus depreciation restored permanently to 100%. Combined potential: write off millions in equipment immediately.
These aren't temporary incentives that will expire. These are now permanent features of the tax code (unless future legislation changes them).
The difference between Section 179 and bonus depreciation isn't just tax jargon, it's real money that stays in your business or goes to the IRS. Under current rules, combining both strategies can create immediate tax savings that fundamentally improve your cash flow and competitive position.
Choose wisely. Document carefully. Act strategically.
At Construction Cost Accounting, we help construction companies navigate current tax law changes and make equipment decisions that maximize tax benefits while supporting operational needs.
Need help figuring out the best strategy? That's exactly what we do.
