You closed on a $220,000 excavator in March. Your CPA says “Section 179,” you nod, and the meeting moves on. Sound familiar?
Here’s what usually goes unsaid. Since the One Big Beautiful Bill Act (OBBBA) made 100% bonus depreciation permanent, most contractors can write off the full price of a machine in year one without touching Section 179 at all. So the real questions are which deduction to use, how much of it, and what your state does with it.
This guide covers the 2026 limits, the traps that are specific to construction equipment, the Form 4562 mechanics, the cash-flow math on a financed machine, and the tax bill that shows up when you sell. It assumes a calendar-year taxpayer. Anything marked “illustrative” runs on the assumptions stated next to it, not on your return.
2026 Section 179 and bonus depreciation limits
| Item | 2026 amount | Notes |
|---|---|---|
| Maximum Section 179 deduction | $2,560,000 | Rev. Proc. 2025-32; indexed for inflation |
| Phase-out begins | $4,090,000 | Total cost of §179-eligible property placed in service |
| Deduction reaches zero | $6,650,000 | Reduced dollar-for-dollar in between |
| Heavy SUV cap (6,001–14,000 lb GVWR) | $32,000 | Bonus can cover the remainder of the vehicle |
| Bonus depreciation | 100% | Property acquired after Jan. 19, 2025 (IRS guidance) |
| Excess business loss threshold (§461(l)) | $256,000 single / $512,000 joint | Individuals and pass-through owners |
| QBI full-deduction threshold | $201,750 single / $403,500 joint | Phase-in range widened to $75,000 / $150,000 |
Three rules sit behind these numbers, and each one can change what you actually get.
The phase-out is gradual, not a cliff. Buy $4,590,000 of eligible equipment and the cap drops by $500,000, to $2,060,000. The test counts the cost of all eligible property placed in service, including machines you don’t elect §179 on. Big fleets hit this fast. Bonus depreciation has no phase-out, so it picks up the overflow.
The income limit counts taxable income from businesses you actively run. Your deduction can’t go above taxable income from trades or businesses you meaningfully participate in. That’s figured before the §179 deduction, the deduction for half of self-employment tax and any NOL deduction. Wages count. Net §1231 gains from the business count. Joint filers combine both spouses. Passive investment income doesn’t. Anything disallowed carries forward.
Pass-throughs get tested twice, and the two tests don’t measure the same thing. A partnership or S corporation runs the dollar limit, the phase-out and the income limit on its own numbers: its own equipment cost and its own active business income. Then each owner runs the tests again on the owner’s return. The owner’s dollar limit covers all §179 from every source, K-1 amounts included. The owner’s phase-out looks only at equipment the owner bought directly, not at what the entity bought. The owner’s income limit is wider than the entity’s: wages, Schedule C profit and the owner’s share of K-1 business income, with the entity’s §179 deduction left out of that income (Publication 946; Form 4562 instructions, line 11; 26 U.S.C. §179(b)(3)). Each level carries forward what it can’t use. The entity keeps its own disallowed amount, and the owner keeps the share the owner’s limit blocks. A sole proprietor or a C corporation gets a single test.
The two deductions work differently. Bonus is automatic. To opt out, you do it by asset class on a timely filed return, and you can’t undo it without IRS consent. Section 179 is an election, so you can size it (or change it on an amended return) when the return is prepared. That flexibility after year-end is the most underrated thing about it.
Income-limit example (illustrative). Say a married couple buys $400,000 of equipment. Spouse A is a sole proprietor with $180,000 of net Schedule C profit before any §179 deduction. Spouse B earns $90,000 in W-2 wages. The limit is $270,000, so that’s the most they can elect. The other $130,000 can be carried forward or, more often, taken as bonus depreciation, which has no income limit.
Two things this example doesn’t say. Spouse A is a sole proprietor, so there’s no entity-level test here. An S corporation owner would need the entity to pass its own test first. And Spouse B’s wages only raise the ceiling on the §179 election. They don’t make a business loss safe to deduct. Basis, at-risk, passive-loss and §461(l) rules apply on their own (more on those below).
Section 179 vs. bonus depreciation: which one to use
Federally, bonus applies by default to qualifying 5-year construction equipment. Heavy construction sits in asset class 15.0, a 5-year MACRS class per IRS Publication 946. That makes Section 179 more of a precision tool than a default. Here’s when it earns its keep:
| Situation | Better approach | Why |
|---|---|---|
| Your state follows §179 but decouples from bonus (Arizona is a documented example; check yours) | §179 on as much cost as the state allows, bonus on the rest | The state return gets a bigger deduction; model the state result before relying on it |
| You want to size the deduction machine by machine | Opt out of bonus for the class; elect §179 on chosen assets | Bonus is all-or-nothing within a class; §179 is per asset and per dollar |
| Income is low this year or you expect higher brackets later | Opt out of bonus; §179 only up to the income you want to offset; MACRS on the rest | Avoids using deductions in a low bracket |
| Purchases are weighted toward Q4 and you opt out of bonus | §179 on enough of the Q4 asset to pass the 40% test | See the mid-quarter examples below |
| Owner is near the §461(l) loss limit | §179, which can’t exceed income | Avoids a deduction that becomes a carried-forward NOL |
| Purchases exceed $6.65 million | Bonus | §179 is phased out entirely |
| Federal-only exposure, no state adjustments | Bonus (automatic) | No election to forget |
The mid-quarter trap
Opt out of bonus and place more than 40% of the year’s depreciable basis in service in the last three months, and MACRS switches to the mid-quarter convention. Then 5-year property placed in service in Q4 gets a 5% first-year rate instead of 20%.
The test covers all depreciable property placed in service that year. The exceptions are nonresidential real property, residential rental property and assets placed in service and disposed of in the same year. Test basis is reduced by any §179 deduction, but not by bonus (Publication 946). Illustrative cases, all with bonus opted out:
| Case | Q4 share of test basis | Convention | First-year deduction |
|---|---|---|---|
| A. $300,000 excavator placed in service Dec. 18; nothing else bought | 100% | Mid-quarter | $15,000 (5% of $300,000) |
| B. Same excavator plus $700,000 of equipment placed in service Mar.–Jun. | 30% | Half-year | $60,000 on the excavator (20%) |
| C. Same excavator plus $400,000 placed in service in March | 42.9% ($300,000 of $700,000) | Mid-quarter | $155,000 total ($140,000 on the March assets at 35%, $15,000 on the excavator) |
| D. Case C with $100,000 of §179 elected on the excavator | 33.3% ($200,000 of $600,000) | Half-year | $220,000 total ($100,000 §179 + 20% of $600,000) |
Case D beats case C by $65,000 of first-year deduction. That’s about $16,600 of tax at the 25.6% effective rate used in the case study below. And because bonus doesn’t reduce test basis, the trap only matters if you opt out of bonus.
What qualifies in construction
Property must be tangible, depreciable, acquired for use in your business, and used more than 50% for business. Mixed-use assets are deductible only for the business-use share.
Eligible without much debate: excavators, dozers, skid steers, wheel loaders, backhoes, cranes, concrete pumps, pavers, compactors, generators, light towers, lowboys and equipment trailers, portable compressors, and trucks over 14,000 lb GVWR (dump trucks, mixers, tractors).
Eligible, but know the rules:
- Attachments (hammers, grapples, augers, thumbs) are part of the machine’s cost basis, whether bundled or invoiced separately. Itemize them anyway. If you later sell the machine and keep the attachment, or the attachment goes into service on a different date, an itemized invoice gives you clean per-asset basis and recapture figures.
- Machine control, GPS grading and telematics qualify when they’re integral to the equipment. Standalone project-management software is treated differently.
- Cost basis is more than the sticker price. It includes sales tax, freight, rigging, assembly and initial calibration. It excludes financing interest.
Pickups, SUVs and heavy trucks
GVWR on the door-jamb label controls, not the brochure.
| Vehicle | §179 treatment |
|---|---|
| Truck over 14,000 lb GVWR | No SUV cap |
| Pickup 6,001–14,000 lb GVWR with a bed of at least 6 feet | No SUV cap |
| Pickup 6,001–14,000 lb with a shorter bed, or any SUV or crossover | $32,000 cap on §179; bonus covers the balance |
| Passenger car at or under 6,000 lb | Luxury-auto annual caps (roughly $20,000 in year one with bonus) |
If business use is 50% or less, none of it qualifies. Keep a mileage log that survives an exam.
Not eligible for §179
Buildings and structural components (a prefab office on your lot), inventory, materials, and land improvements such as grading, paving and fencing. Land improvements are generally 15-year property that still qualifies for bonus depreciation, which is the practical answer for a contractor paving his own yard. Certain roofs, HVAC, fire-protection and alarm systems on nonresidential buildings are the exception that can qualify for §179.
The equipment-holding LLC: test §179(d)(5) before you buy
Many contractors hold machines in a separate LLC and lease them to the operating company. Under §179(d)(5), a noncorporate lessor can’t take §179 on leased property unless it manufactured or produced the property. The only other way out is when both of these hold:
- The lease term, including renewal options, is under 50% of the property’s class life (three years for the 6-year construction class).
- In the first 12 months after the transfer, the lessor’s §162 deductions on the property, excluding rents and reimbursed amounts, exceed 15% of the rental income (Publication 946).
Whether the rule applies depends on who the lessor is for tax purposes. A single-member LLC is disregarded, so its owner is the lessor. It also depends on whether the lessor is a corporation (the rule doesn’t apply) and whether the arrangement is a true lease. Bonus depreciation isn’t subject to this restriction, but it has its own requirements. So have your CPA test the lease before the machine is bought.
Placed in service: the test and the evidence
The legal test is that the asset is ready and available for its specific use by December 31 (see Publication 946). Delivery alone doesn’t satisfy it. An operator’s schedule doesn’t defeat it either. A project assignment is evidence, not a legal requirement.
| Evidence | What it proves | Weak point |
|---|---|---|
| Signed delivery receipt with date and location | Possession | Says nothing about readiness |
| OEM telematics or hour-meter log showing first engine hours | Machine was operable and used | Strongest single record; check it exports with timestamps |
| Dealer pre-delivery inspection and commissioning record | Setup and safety checks done | Date must be on or before Dec. 31 |
| Insurance binder or equipment schedule with an effective date | Business treated it as in service | Supporting only |
| Dispatch or job-assignment record | Intent to use | Doesn’t prove readiness alone |
There’s a gray area worth planning around. A machine is delivered December 28, but its machine-control kit gets installed in January. If the machine can do its work without the kit, it’s likely in service. If the job requires the kit, you’re exposed. Get the kit installed first, or choose delivery dates accordingly.
Realistic supply at this point in the year. It’s late October. Factory orders for popular models rarely arrive within 70 days, so the dependable paths are in-stock new units, dealer used inventory, auction purchases and rental-fleet sales. Ask every dealer for a written delivery date and whether the unit is physically on the lot.
Financing, leasing and the cash-flow reality
You can deduct the full cost of a financed machine. The loan doesn’t reduce eligible basis, and loan interest is deducted separately. What the loan changes is cash timing: the deduction lands on your tax return while the payments run for five years.
The case study below puts one financed excavator through three depreciation strategies. Two cautions apply to any calculation like it. First, the tax saving is a computed figure, not a guaranteed refund. It depends on taxable income, the income and loss limits above, your entity type and your other deductions. Second, expensing pulls several years of deductions into one, so taxable income steps up in later years unless you keep replacing equipment.
Leases. The tax label matters more than the paperwork label. A lease with a $1 or nominal buyout, or a term covering most of the machine’s life, is treated as a conditional sale. You’re the owner, and your basis is the purchase price, not the present value of the payments. A true (fair-market-value) lease leaves ownership with the lessor, and you deduct rent as an operating expense.
Used equipment
Both deductions apply to used machines. The IRS bonus depreciation guidance (Notice 2026-11) sets the conditions. In practice they come down to this:
- You or a predecessor never used the property before buying it.
- The seller is unrelated: not a spouse, parent, child, sibling, or an entity you control (more than 50%).
- Your basis isn’t carried over from the seller or from property you traded.
- It wasn’t inherited.
Auctions and dealer inventory usually pass. The failures come from family sales and from buying back equipment your own business held earlier. Keep the bill of sale and a short written confirmation that the seller is unrelated.
The tax code subsidizes cost in proportion, so it never changes which machine is the better value. A $240,000 used excavator nets to about $168,000 after tax at 30%. A $420,000 new one nets to about $294,000. The gap is real, but it’s the price gap, not a tax advantage. Compare hours to next major repair, warranty and expected resale. And remember that a fully expensed machine has zero tax basis, so every future resale dollar is taxable up to the machine’s original cost (see the selling section below).
How to claim the deduction on Form 4562
Line numbers follow the current Form 4562 layout. Confirm against the year’s instructions.
- Part I, line 2: total cost of all §179 property placed in service. Lines 3–5 apply the threshold and reduction to get your dollar limit.
- Line 6: each asset you elect on, with its cost and elected amount. This is where per-asset sizing happens.
- Line 10: carryover from prior years. Line 11: business income limit. Line 12: the deduction allowed. Line 13: carryover to next year.
- Part II, line 14: bonus depreciation. Opting out requires an election statement attached to a timely filed return.
- Part III: MACRS on whatever isn’t expensed. Part IV, line 22: total depreciation that flows to the return.
S corporations and partnerships compute the deduction at the entity level and report each owner’s share on Schedule K-1. The owner then runs the dollar limit on all §179 from every source, and the income test on all active income, on the owner’s own return. Sole proprietors report on Schedule C.
Because you can set §179 amounts when preparing the return, ask your CPA for a projection in January showing three versions: all bonus, §179 plus bonus, and §179 plus MACRS. Keep the fixed-asset ledger, purchase documents and placed-in-service evidence until the limitations period closes for the year you dispose of the asset.
Taxable income effects: QBI, §461(l) and S corporation basis
What expensing does to your federal tax, with conditions. Each $1 of deduction reduces qualified business income (QBI) by $1, and so cuts the 20% QBI deduction by $0.20 (§199A). The net federal saving is then your marginal rate × 0.8. But that only holds when three conditions are met:
- The business is a qualified trade or business (construction generally is not a specified service trade).
- The QBI deduction isn’t already limited by the wage-and-property cap, which starts above $201,750 single / $403,500 joint of taxable income and phases in over the next $75,000 / $150,000.
- It isn’t limited by 20% of taxable income less net capital gain.
If the cap is already binding, extra expensing may not reduce your QBI deduction at all until 20% of QBI falls below it. Expensing also lowers taxable income, and that can bring the 20%-of-taxable-income limit into play. QBI is a federal concept, and most states don’t offer it, so the state saving is simply the state rate × 1.0.
Illustrative, with the conditions met: $300,000 expensed at a flat 32% saves $96,000, minus $19,200 from the smaller QBI deduction, for $76,800. Treat that as a model, not a coefficient that fits every contractor. When a limit above bites, the 0.8 factor moves with it. A deduction this size can also pull you into lower brackets, which pushes the real saving below the flat-rate figure.
New for 2026: a minimum QBI deduction. For tax years beginning after Dec. 31, 2025, a taxpayer with at least $1,000 of QBI from businesses they materially participate in gets a QBI deduction of at least $400. At excavator scale it rarely matters. It only shows up when the regular 20% deduction would come to less than $400, and it disappears if expensing pushes active QBI below $1,000. None of the examples in this guide depends on it.
Equipment can raise the wage-and-property cap, but only in specific cases. Above the phase-in range, the QBI deduction is capped at the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. Qualified property is tangible, depreciable property held and available for use at year-end and used to produce QBI. Its depreciable period (the later of 10 years after placement in service or the end of its recovery period) must not have ended. UBIA is measured before depreciation, so §179 and bonus don’t reduce it.
The 2.5% term helps only when wages are low relative to equipment, which describes contractors who rely on subcontractors. Illustrative: with $100,000 of wages, $1,500,000 of QBI and $2,000,000 of UBIA, the cap is $50,000 on the wage test alone and $75,000 ($25,000 + $50,000) with property, so up to $25,000 more deduction. With $600,000 of wages, the 50% wage test ($300,000) already covers 20% of the same QBI, and the equipment adds nothing. Partnership and S corporation UBIA is allocated to owners by ownership share.
Bonus can create a loss, and §461(l) limits it. A joint filer can deduct a net business loss of only $512,000 in 2026 (single filers $256,000). The excess becomes an NOL carried forward and usable against 80% of future taxable income (§461(l)).
Illustrative: an S-corporation owner has $600,000 of income before depreciation and expenses $1,400,000 of equipment with bonus. The business loss is $800,000, which is $288,000 above the threshold, so that amount is deferred. Using §179 for $600,000 and MACRS on the rest produces a smaller current deduction. But it keeps ordinary depreciation flowing in later years instead of an NOL with an 80% cap. Many states don’t apply the same loss rules, which adds a state-level mismatch.
S corporation and partnership owners also face basis, at-risk and passive-loss limits. A large deduction reduces stock or partnership basis, and a loss exceeding basis is suspended.
Selling equipment: recapture is ordinary income
The recapture bill doesn’t follow a five-year percentage schedule. When you sell, §1245 treats gain up to all depreciation taken (including §179 and bonus) as ordinary income. Separately, if business use of §179 property drops to 50% or less, the excess deduction is recaptured as ordinary income (§1245). Report dispositions on Form 4797.
Gain is ordinary income up to the depreciation you took, and gain above original cost is §1231 gain. Four numbers drive the result: original cost, depreciation taken (which sets adjusted basis), sale price and the year of sale. A fully expensed machine has zero basis, so every sale dollar up to its original cost is ordinary income. The case study below carries one machine from purchase to sale under three depreciation strategies.
- Trade-ins don’t defer anything. Like-kind exchange treatment no longer applies to equipment. A trade-in is a sale of the old machine plus a purchase of the new one. The new machine’s full price is still deductible, so a same-year replacement usually offsets the recapture on the old machine.
- MACRS doesn’t avoid recapture. §1245 applies to all depreciation. The method changes how much has been deducted when you sell, not whether recapture exists.
- The method changes timing, not the lifetime total. At a constant tax rate, the permanent benefit equals the machine’s economic loss (cost minus sale proceeds) times your effective rate. Expensing front-loads it, and recapture returns part of it later. Rates that differ between the purchase year and the sale year are what make the choice matter.
- An installment sale doesn’t defer recapture. Recapture income is recognized in the year of sale (§453(i)).
State conformity: where the federal deduction gets reduced
State rules sit on top of your federal elections. Most states start from federal taxable income, then add back some or all bonus depreciation, and some apply their own §179 limits.
The table describes income-tax treatment for individuals and pass-through owners as of its sources’ dates (January–July 2026). Corporate, pass-through-entity-tax and gross-receipts rules can differ. Legislatures also change conformity mid-year, so confirm every row with the agency before relying on it.
| State | Bonus (§168(k)) | §179 | Notes | Agency |
|---|---|---|---|---|
| California | Not allowed; add back | $25,000 cap, reduced dollar-for-dollar above $200,000 of purchases | Reported on FTB Form 3885A; does not follow the OBBBA increase | FTB |
| Arizona | Decoupled | Conforms to the OBBBA increase | 2026 legislation moved the conformity date to Jan. 1, 2026 | ADOR |
| Illinois | Add-back required | Generally follows federal | Also decoupled from §168(n) | IDOR |
| New York | Add-back required | Verify annually | Keep a separate state depreciation schedule | NYS Tax |
| Pennsylvania | Decoupled | Verify | Taxes by income class, not federal taxable income | PA Revenue |
| Colorado | Decoupled | Verify | CO Taxation | |
| Florida | Static conformity date Jan. 1, 2025, before OBBBA | Same | No personal income tax; corporate income tax applies to C corporations | FL DOR |
| Ohio | Static date Mar. 7, 2025, before OBBBA | Same | Check 2026 legislation | Ohio Taxation |
| Texas | No personal income tax | Franchise tax has its own rules | Ask how depreciation flows into cost of goods sold | Comptroller |
Basis for the table: FTB Form 3885A instructions (California limits, as summarized by CPA firms in 2025–2026); RSM, State Corporate Income Tax Law Changes (Jan. 9, 2026); KPMG SALT Alert (Feb. 2026); Forvis Mazars, Arizona conformity update (July 2026); Vedder Price, OBBBA and heavy equipment; sales.tax, State Tax Conformity in 2026. These are secondary summaries, not agency pronouncements. The agency links are where to confirm.
Where a state decouples from bonus, you need a separate state depreciation schedule and a state-only tax basis, which changes your gain or loss on a later sale. The case study quantifies a California-type result.
Case study: one $300,000 excavator under three strategies
One machine, one taxpayer, three ways to recover its cost. Every figure follows from the assumptions below. Change an input and the result changes.
- Machine: new $300,000 excavator, 5-year MACRS, placed in service in September 2026 (half-year convention, no mid-quarter issue).
- Financing: 10% down ($30,000); $270,000 loan at 8% fixed over 60 monthly payments, so $5,474 a month ($65,688 a year); no fees.
- Taxpayer: married S-corporation owner whose income is high enough that the §179 income limit and §461(l) don’t bind.
- Federal rate: a flat 32% on the deduction, with the 20% QBI deduction fully available and uncapped, so each deduction dollar saves 25.6% (32% × 0.8). Real returns can span brackets, which lowers the saving.
- Discounting: 8%. Each year’s tax saving is counted as received at the end of that year, so 2026 is discounted one period and 2031 six.
- Strategies: A = 100% bonus (the default). B = $200,000 of §179, opt out of bonus, MACRS on the other $100,000. C = opt out of bonus, MACRS only.
1. What you deduct and what it is worth
| Tax year | A: Bonus | B: §179 $200,000 + MACRS | C: MACRS only |
|---|---|---|---|
| 2026 | $300,000 | $220,000 | $60,000 |
| 2027 | $0 | $32,000 | $96,000 |
| 2028 | $0 | $19,200 | $57,600 |
| 2029 | $0 | $11,520 | $34,560 |
| 2030 | $0 | $11,520 | $34,560 |
| 2031 | $0 | $5,760 | $17,280 |
| Total deduction | $300,000 | $300,000 | $300,000 |
| Total tax saving at 25.6% | $76,800 | $76,800 | $76,800 |
| Present value of the saving at 8% | $71,100 | $68,200 | $62,300 |
At these assumptions, expensing is worth about $8,800 more than MACRS alone, or 2.9% of the price. So when does MACRS catch up? Under C, $60,000 of the deduction still lands in 2026 at this year’s rate. Only the other $240,000 can be worth more later, so the break-even compares just those later years.
Discount the deductions at 8% and the picture looks like this. Strategy A’s $300,000 counts as $277,778. Under C, the 2026 deduction counts as $55,556 and the 2027–2031 deductions as $187,842. For C to match A, each later-year deduction dollar has to save more than a 2026 dollar by $222,222 ÷ $187,842 − 1, which is 18.3%. That’s the saving per deduction dollar, meaning your bracket × 0.8 while the QBI deduction is fully available in both years. In bracket terms it’s a move from 32% to about 37.9%. The top federal bracket is 37%, only 15.6% above 32%, so it isn’t enough. Deferral wins only if something else lifts the later-year saving, such as a higher state rate or a QBI deduction that’s capped later and not now.
2. Cash flow with the loan
| First 12 months | Months 13–24 | |
|---|---|---|
| Cash paid (down payment + loan payments) | $95,688 | $65,688 |
| Tax saving, strategy A | $76,800 | $0 |
| Tax saving, strategy B | $56,320 | $8,192 |
| Tax saving, strategy C | $15,360 | $24,576 |
| Net cash cost, strategy A | $18,888 | $65,688 |
| Net cash cost, strategy B | $39,368 | $57,496 |
| Net cash cost, strategy C | $80,328 | $41,112 |
Strategy A returns about 80% of the first-year cash outlay through lower tax. Then comes the year-two step-up: no new deductions while the payments keep running. Loan interest is deductible separately and is left out. These savings are modelled, not guaranteed refunds.
3. Selling in December 2029 for $190,000
| A | B | C | |
|---|---|---|---|
| Depreciation taken through 2029 (half-year in the sale year) | $300,000 | $276,960 | $230,880 |
| Adjusted basis | $0 | $23,040 | $69,120 |
| Gain on sale (all ordinary under §1245, since it is below cost) | $190,000 | $166,960 | $120,880 |
| Tax on the gain at 25.6% | $48,640 | $42,742 | $30,945 |
| Tax saved by the deductions at 25.6% | $76,800 | $70,902 | $59,105 |
| Net lifetime benefit | $28,160 | $28,160 | $28,160 |
All three strategies land on the same number: ($300,000 − $190,000) × 25.6% = $28,160. The method decides when you receive the benefit, not how much. The table assumes recapture is taxed at the same 25.6% net rate, since ordinary gain from a business asset is generally QBI.
4. The state layer: a California-type result
Add a California resident S-corporation owner at a flat 9.3% state rate (individual tax on pass-through income, ignoring any elective pass-through entity tax). California allows no bonus, and its $25,000 §179 limit phases out completely once purchases pass $225,000. So the state return uses 5-year MACRS under all three strategies.
| Year | Federal deduction (A) | California deduction | Extra California taxable income | California tax at 9.3% |
|---|---|---|---|---|
| 2026 | $300,000 | $60,000 | +$240,000 | +$22,320 |
| 2027 | $0 | $96,000 | −$96,000 | −$8,928 |
| 2028 | $0 | $57,600 | −$57,600 | −$5,357 |
| 2029 (sale) | $0 | $17,280 | −$86,400 ($17,280 depreciation + $69,120 lower gain) | −$8,035 |
| Total | $300,000 | $230,880 | $0 | $0 |
California costs about $22,300 of extra tax in year one, fully reversed by the sale year. The state result is the same under A, B and C, so the federal choice doesn’t change it. But you carry a $69,120 state basis at sale against zero federally.
Electing §179 for state reasons pays only when the state rate is high. Say a state follows your federal §179 election. Moving from A to B here costs about $2,900 of federal present value and gains about $1,150 on the state return at a 5% state rate. Break-even is a state rate near 13%, so for most states bonus federally remains the better default.
Realistic Q4 2026 timeline
- By mid-November: choose in-stock new or used units, confirm sellers are unrelated, and sign purchase agreements stating a delivery date.
- Late November to mid-December: schedule delivery, commissioning, any machine-control installation and insurance. Run the mid-quarter test if you plan to opt out of bonus.
- December 15–31: confirm each machine is ready and operating, capture telematics and photo evidence, and save the commissioning record.
- January: have your CPA model the three scenarios (all bonus, §179 plus bonus, §179 plus MACRS) with state results.
- At filing: confirm line 2 total, line 6 asset detail, the bonus opt-out statement (if used), state addbacks and the separate state depreciation schedule.
