100% Bonus Depreciation and $2.56 Million Section 179 Limit for 2026

If your business is planning to buy equipment, vehicles, computers or software, the federal rules for 2026 are among the most generous in years. The federal tax law enacted on July 4, 2025 (Public Law 119-21) permanently restored 100 percent bonus depreciation, more than doubled the Section 179 expensing limit, and once again lets businesses deduct domestic research costs right away. With the year-end approaching, here is what you need to know, including the important caveat for California.

100 percent bonus depreciation, permanently

Under the 2017 tax law, bonus depreciation was phasing down: 80 percent in 2023, 60 percent in 2024 and 40 percent in 2025. The 2025 law reversed that. Qualified property acquired and placed in service after January 19, 2025 is eligible for a permanent 100 percent first-year deduction.

What qualifies. Generally, new or used tangible property with a recovery period of 20 years or less, such as machinery, equipment, furniture, computers and many vehicles, as well as off-the-shelf software and qualified improvement property (certain interior improvements to nonresidential buildings).
The acquisition date matters. Property is not treated as acquired after January 19, 2025, if you signed a written binding contract for it before that date. Such property follows the old phase-down percentages.
Vehicles. For vehicles and other “listed property,” business use must be more than 50 percent to claim bonus depreciation, and passenger automobiles remain subject to annual dollar limits on depreciation.
Opting out. Bonus depreciation is the default, but you can elect out by class of property. That can make sense if you expect to be in a higher bracket in future years or if a big deduction would only create a loss you cannot use.

Section 179: $2,560,000 for 2026

Section 179 lets you elect to expense the cost of qualifying property instead of depreciating it. The 2025 law raised the limit to $2,500,000 (indexed for inflation). For tax years beginning in 2026:

The maximum Section 179 deduction is $2,560,000.
The limit is reduced dollar for dollar once the cost of Section 179 property placed in service during the year exceeds $4,090,000.
The amount you can expense for a sport utility vehicle is limited to $32,000.

Section 179 cannot create a loss: the deduction is limited to your taxable income from active trades or businesses, with any excess carried forward. Bonus depreciation does not have that limit (although a resulting loss is then subject to the net operating loss and other loss-limitation rules), which is why many businesses use both: Section 179 for selected assets and bonus depreciation for the rest.

“Placed in service” by year-end

For both bonus depreciation and Section 179, the property must be placed in service, meaning ready and available for its intended use, during the tax year. For a calendar-year business, that means by December 31. Ordering or paying for equipment in December is not enough if it is not delivered and set up until January. If you are planning a purchase for 2026, confirm delivery and installation dates now.

Research and development costs

Since 2022, businesses had to spread domestic research and experimental costs, including many software development costs, over five years. For tax years beginning after December 31, 2024, new section 174A allows domestic research costs to be deducted in full in the year paid or incurred, or, if you choose, amortized over at least 60 months. Foreign research costs must still be amortized over 15 years.

For domestic costs capitalized in 2022 through 2024, the law lets a business deduct the remaining unamortized amount in its first tax year beginning after 2024, or spread it evenly over two years. For a calendar-year business that chose the two-year option, the second half is deducted on the 2026 return. Separately, eligible small businesses had a one-time option to apply the new rules retroactively to 2022 through 2024 on amended returns; the IRS deadline for that election was July 6, 2026.

Other business items worth a look

Qualified business income (QBI) deduction. The deduction of up to 20 percent of qualified business income for owners of pass-through businesses is now permanent.
Qualified production property. Manufacturers and certain other producers may be able to deduct 100 percent of the cost of new factory and production buildings if construction begins after January 19, 2025, and before 2029, and the property is placed in service before 2031. Office, sales and administrative space does not qualify.
Employer-provided childcare credit. For 2026, the maximum credit increases to $500,000, or $600,000 for eligible small businesses.

The California difference

California does not follow most of these federal changes. According to the Franchise Tax Board’s summary of the federal law (last updated October 2026):

California does not allow federal bonus depreciation for individuals and pass-through owners, and its corporate rules use a different depreciation system.
California does not adopt the higher federal Section 179 dollar limits; it keeps its own, much lower limits.
California does not conform to the new section 174A research expensing rules or to the federal QBI deduction.

The practical result: a large equipment purchase can produce a big federal deduction in 2026 but a much smaller one on your California return, with the difference recovered through depreciation in later years. Your books should track separate federal and California depreciation schedules.

Planning before year-end

Make a list of planned purchases and confirm they can be placed in service before your tax year ends (December 31 for calendar-year businesses).
Compare a big 2026 deduction with your expected income in 2027 and beyond.
For vehicles, document business use percentage with a mileage log.
Estimate both federal and California tax so there are no surprises.

Sources

Timing equipment purchases well can make a real difference to your tax bill. Don’t hesitate to contact the office or call us at (858) 549-1295 before you buy.

This article provides general information as of October 2026 and is not tax advice for your specific situation. Tax rules change, and the right answer depends on your facts.