If you're a small business owner, 2026 is the last year you'll see any bonus depreciation at all. The generous 100% first-year write-off from the Tax Cuts and Jobs Act has been phasing down steadily, and by 2027 it disappears entirely. Here's where things stand and what tools you still have.
The Bonus Depreciation Phase-Down
The TCJA originally allowed businesses to immediately deduct the full cost of qualifying assets in the year they were placed in service. That benefit has been shrinking on a fixed statutory schedule:
| Tax Year | Bonus Depreciation Rate |
|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0% |
In practical terms, if you buy a $100,000 piece of equipment and place it in service in 2026, you can immediately expense $20,000 through bonus depreciation. The remaining $80,000 gets depreciated over the asset's normal recovery period using MACRS (Modified Accelerated Cost Recovery System).
What Qualifies
Bonus depreciation applies to tangible property with a recovery period of 20 years or less — think equipment, machinery, vehicles, furniture, and certain leasehold improvements. It also applies to used property (not just new), which was a TCJA expansion that remains in effect.
Section 179: The Workhorse That Doesn't Phase Down
While bonus depreciation fades, Section 179 expensing remains fully intact and continues to be indexed for inflation.
For 2026, the estimated limits are:
| Section 179 Parameter | 2026 Estimate |
|---|
| Maximum deduction | $1,250,000 |
| Phase-out threshold (total assets placed in service) | $3,130,000 |
| Complete phase-out | $4,380,000 |
Section 179 lets you deduct the full purchase price of qualifying equipment and software in the year it's placed in service — up to the annual limit. Unlike bonus depreciation, Section 179 has been a permanent part of the tax code since long before the TCJA and isn't going anywhere.
Key Differences from Bonus Depreciation
- Income limitation: Section 179 deductions can't exceed your business's taxable income for the year. Bonus depreciation can create a net operating loss.
- Election required: You must elect Section 179 on your return. Bonus depreciation applies automatically unless you opt out.
- Asset-by-asset choice: You can choose which specific assets to expense under Section 179. Bonus depreciation is all-or-nothing by asset class.
For most small businesses buying under $1.25 million in assets, Section 179 alone covers what bonus depreciation used to handle.
The QBI Deduction: Extended and Still Powerful
The 20% Qualified Business Income (QBI) deduction was one of the TCJA's biggest wins for small business. It was originally set to expire after 2025, but the One Big Beautiful Bill made it permanent — keeping it available for 2026 and beyond.
How QBI Works
If you operate as a sole proprietor, S-corp shareholder, or partner in a partnership, you can deduct up to 20% of your qualified business income from your taxable income. This is an above-the-line deduction, meaning it reduces your taxable income whether you itemize or take the standard deduction.
The Limits
QBI isn't unlimited. For specified service trades or businesses (SSTBs) — which include fields like law, medicine, accounting, consulting, and financial services — the deduction phases out above certain income thresholds:
| Filing Status | Phase-In Starts | Phase-Out Complete |
|---|
| Single | $191,950 | $241,950 |
| Married Filing Jointly | $383,900 | $483,900 |
(2026 estimated thresholds, indexed for inflation)
Below these thresholds, the full 20% deduction is available regardless of business type. Above them, SSTBs lose the deduction entirely. Non-SSTB businesses face a different limitation tied to W-2 wages paid and the unadjusted basis of qualified property, but the deduction doesn't disappear.
Why the Extension Matters
Had the QBI deduction expired, a sole proprietor earning $150,000 in business income would have lost a $30,000 deduction — effectively a tax increase of $6,600 or more depending on bracket. The extension preserves this benefit and provides continued incentive for pass-through business structures.
Planning Strategies for 2026
Accelerate Asset Purchases
If you're considering major equipment or vehicle purchases, there's a clear case for buying in 2026 rather than waiting. The 20% bonus depreciation available this year drops to zero in 2027. Even if Section 179 covers most situations, having both options gives you more flexibility — especially if you're buying assets that exceed Section 179 limits or if your business income is too low to fully use Section 179.
Stack Section 179 with Bonus Depreciation
You can use both provisions on different assets (or even on the same asset in certain situations). A business purchasing $1.5 million in equipment could expense $1,250,000 under Section 179 and apply 20% bonus depreciation to the remaining $250,000 — an additional $50,000 first-year deduction.
Evaluate Your Entity Structure
With QBI secured for the foreseeable future, it's worth reviewing whether your business structure is optimized. An LLC taxed as a sole proprietorship, an S-corp election, or a partnership structure each interact differently with:
- The QBI deduction and its wage/property limitations
- Self-employment tax exposure
- Reasonable compensation requirements (S-corps)
The right structure depends on your income level, whether you're an SSTB, and how much you pay in W-2 wages.
Time Your Income if Possible
For businesses with some control over when income is recognized (consulting contracts, project billing, etc.), consider whether bunching income into 2026 or deferring to 2027 produces a better result. The QBI deduction applies in both years, but the interplay with bonus depreciation, Section 179 limits, and bracket positioning may favor one year over the other.
The Bottom Line
Bonus depreciation at 20% is thin, but it's not nothing. Combined with Section 179's full $1.25 million limit and the extended QBI deduction, small business owners still have meaningful tax tools in 2026. The real urgency is on the depreciation side — this is the last year to capture any bonus depreciation at all. If you've been putting off equipment purchases, the clock is ticking.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.