Contractor Equipment Depreciation: Expensing vs. Depreciating That New Machine in 2026

For 2026, most contractor equipment purchases can be written off in full the year the machinery goes to work. The choice between expensing and depreciating still matters, because the wrong call can cost you a deduction you can't get back. Contractor equipment depreciation comes down to three tools. Section 179 lets you deduct up to $2,560,000 of equipment placed in service in 2026. Bonus depreciation, a first-year write-off of the full cost of qualifying equipment, is back to 100% for qualified property in 2026. You only depreciate over time when spreading the deduction across years actually helps your tax picture — like when income is low this year and you want deductions in future years instead.

Small-business expensing was capped near $25,000 in the early 2000s. Congress raised it to a permanent $500,000 in 2015, doubled it to $1 million in 2017 — and specifically wrote roofs, HVAC, fire protection, and security systems into the statute as eligible property. The 2025 tax law raised it again to $2.5 million, with the phase-out starting at $4 million, for property placed in service after December 31, 2024. Four Congresses, both parties, one direction. A contractor expensing a truck, an excavator, or a rooftop unit is using this deduction exactly as Congress intended — trade equipment is written directly into the law (IRS summary of depreciation and expensing rules). For 2026, most equipment purchases can be written off in full the year they go to work. Time purchases around the business, and use depreciation schedules only when spreading the deduction actually helps.

What is Section 179 and how much can you deduct in 2026?

Section 179 is the election that lets a business deduct equipment in full the year it goes to work, instead of depreciating it over years. For 2026, the deduction limit is $2,560,000 (IRC §179(b)(1)). That limit starts to shrink dollar-for-dollar once your total equipment purchases for the year hit $4,090,000 (IRC §179(b)(2)). If you buy less than $4,090,000 in equipment, you get the full deduction. If you buy more, the deduction shrinks — and since the reduction is dollar-for-dollar, it disappears entirely once your purchases exceed the threshold by the full deduction amount.

One wrinkle matters for contractors running heavy vehicles. The Section 179 deduction for an SUV with a gross vehicle weight rating between 6,001 and 14,000 pounds is capped at $32,000 for 2026 (IRC §179(b)(5)). The rest of the cost gets depreciated under normal MACRS schedules or bonus depreciation. This cap does not apply to vehicles over 14,000 pounds — a dump truck or a box truck with a GVWR of 19,500 is not an SUV and is not subject to the $32,000 limit. If you are buying work trucks, the contractor vehicle tax deduction rules interact with Section 179 in ways that change the math significantly.

Section 179 has one restriction that bonus depreciation does not: you cannot deduct more than your business income for the year. If your net business profit is $80,000 and you buy $120,000 worth of equipment, Section 179 caps your deduction at $80,000. The remaining $40,000 carries forward to next year. This matters for sole proprietors and single-member LLCs reporting on Schedule C. It also matters for S-Corps and partnerships, where the income limit applies at the entity level. If you are weighing entity structure for your contracting business, the LLC vs S-Corp comparison for contractors covers how each entity handles these deductions.

You elect Section 179 on Form 4562, which you file with your tax return. The election is item-by-item — you can apply it to one piece of equipment and skip another. That flexibility is the main reason Section 179 exists alongside bonus depreciation: you can fine-tune exactly how much you deduct.

What is bonus depreciation and how is it different from Section 179?

Bonus depreciation is a first-year write-off of the full cost of qualifying equipment — automatic unless you opt out. For 2026, the rate is 100% (IRC §168(k)). This is permanent for qualified property acquired after January 19, 2025, and placed in service during 2026. The old phase-down schedule — which would have dropped bonus to 40% in 2025 under prior law — is gone. There is no year-end deadline race anymore. IRS Notice 2026-11 provides the operating guidance, including an optional 40% election for the first year if you want a lower deduction for some reason (IRS guidance on bonus depreciation).

The practical differences between Section 179 and bonus depreciation come down to three things:

• Section 179 is an election you make item-by-item. Bonus depreciation is automatic on all qualifying property unless you file an opt-out election.
• Section 179 cannot exceed your business income. Bonus depreciation has no income limit — it can create or increase a net operating loss.
• Section 179 caps SUVs at $32,000. Bonus depreciation has no special vehicle cap, though passenger automobiles are still subject to annual depreciation caps.

For most contractors, the approach is mechanical: use Section 179 first, up to your business income. Then apply bonus depreciation to anything left over — including amounts above the Section 179 limit or purchases you chose not to elect under 179. Because bonus is automatic, you get it even if you do nothing. The only reason to opt out is if you want to spread deductions into future years.

Section 179, bonus depreciation, or MACRS — which should you use?

The right choice depends on your income, your bracket, and whether you want the deduction now or later. Here is how the three options compare for 2026:

When does it make sense to depreciate equipment over time instead?

Under MACRS (the Modified Accelerated Cost Recovery System), most contractor equipment falls into a 5-year or 7-year recovery period. A skid steer, compressor, or welder is typically 5-year property. Office furniture and fixtures are 7-year property.

You would choose to depreciate over time when spreading the deduction helps more than taking it all at once. Here are the scenarios where that actually happens:

• Your income is low this year and you expect it to be higher next year. Your tax bracket matters here. Say your deduction is $50,000. You are in the 12% bracket this year. The deduction saves you $6,000. Next year you expect to be in the 24% bracket. That same deduction would save $12,000 instead. Spreading it forward puts the deduction where the rate is higher.
• You want to keep net income above a threshold for financing. Banks look at net income for loan qualification. Writing off a $60,000 truck in one year might drop your reported income below what a lender wants to see.
• You are approaching the QBI phase-out and want to keep business income higher. The QBI deduction phases out for single filers above $201,750 and joint filers above $403,500 in 2026 (IRC §199A(e)). Reducing your business income too aggressively can shrink the QBI deduction you get.
• You are in your first year and have limited business income. Section 179 cannot exceed business income, and taking bonus depreciation would create a net operating loss you may not be able to use fully. Depreciating lets you match deductions to years where you have income to absorb them.

If you use cash basis accounting, your equipment deduction is taken in the year you place the equipment in service, not the year you ordered it or put down a deposit. The timing rules for cash vs. accrual accounting for contractors matter here: "placed in service" means the equipment is ready and available for use in your business, not just sitting in your shop still in the crate.

How does equipment depreciation work for different business entities?

The deduction rules are the same regardless of entity — Section 179, bonus depreciation, and MACRS apply identically whether you are a sole proprietor, a single-member LLC, an S-Corp, or a multi-member LLC. What changes is where the deduction lands on your tax return.

A sole proprietor or single-member LLC taxed as a sole proprietorship reports equipment purchases on Schedule C. The deduction reduces business profit on your personal return, which also reduces your self-employment tax. A $40,000 equipment write-off saves you income tax and self-employment tax on that $40,000.

An S-Corp deducts equipment on Form 1120-S. The deduction flows through to the owners on a K-1. The business itself pays no income tax — the profit lands on your personal return instead. This is pass-through taxation. The equipment deduction reduces the profit that passes through, which reduces each owner's taxable income proportionally.

A multi-member LLC taxed as a partnership works the same way: the partnership deducts the equipment on Form 1065, and the deduction allocates to partners on their K-1s. The multi-member LLC tax rules govern how those allocations work, but the depreciation mechanics are identical.

One entity-specific note: if you operate as an S-Corp, our threshold for when the election starts making sense is consistent net profit around $80,000 to $100,000 per year. Below that, payroll, tax-prep, and state compliance costs eat the savings. Above it, the savings grow faster than the fixed costs. And in our experience representing contractors, a salary of roughly one-third of net profit is the level that consistently holds up as reasonable compensation — what you'd pay a stranger to do your job. The rest comes out as distributions. The equipment deduction reduces the net profit that flows through, but it does not change the salary you need to pay yourself.

What happens when you sell equipment you've already depreciated?

Depreciation recapture is what happens when you sell something you depreciated for a gain — the IRS taxes back part of the deductions you took. The mechanics depend on what kind of property you sold and how much you depreciated it.

Your cost basis goes down by the amount of depreciation you claimed. Say you bought a compressor for $15,000. You wrote off the full cost through Section 179. Your adjusted basis is now zero. You sell it for $6,000. That is a $6,000 gain, all of it recapture. For equipment (Section 1245 property), the recaptured depreciation is taxed as ordinary income at your marginal rate. There is no special low rate on recaptured equipment depreciation.

You achieve tax arbitrage if you deduct the asset's value in a high-income year and recapture it in a low-income year. The setup: you use Section 179 or bonus depreciation to write off a $20,000 compressor entirely in a year when your trade contracting business hits peak revenue, saving you taxes at a high bracket (e.g., 32%). The exit: you sell the compressor for $10,000 in a slower year or after retirement when your personal taxable income drops into a lower bracket (e.g., 12%). The arbitrage profit: you pocket a clean 20% tax rate spread on that $10,000 chunk of value.

If you sold the equipment for less than your adjusted basis, you have a loss. If you used Section 179 or bonus depreciation to write off the full cost, your basis is zero, so any sale price is a gain. This is not a penalty — it is the logical consequence of having already deducted the full cost. The recapture just returns the deduction to the tax system as income when you sell. For contractors who also own residential rental property, the depreciation period is 27.5 years (IRC §168), and recapture on real property works differently — unrecaptured Section 1250 gain is capped at 25% (IRC §1(h)).

Does equipment depreciation affect your QBI deduction?

Yes, indirectly. The QBI deduction is calculated on your net business income after all deductions, including equipment write-offs. If you use Section 179 or bonus depreciation to wipe out most of your business profit, your QBI deduction shrinks because there is less qualified business income to apply the 20% rate to. For 2026, the QBI thresholds are $201,750 for single filers and $403,500 for joint filers (IRC §199A(e)). Below those thresholds, the deduction is straightforward: 20% of QBI. Above them, the W-2 wage and property factors start limiting the deduction.

The interaction matters when you are near the threshold. Say you are a single filer with $250,000 of business income. You buy $60,000 of equipment. Your QBI drops to $190,000. That puts you below the 2026 threshold of $201,750. It could actually increase your QBI deduction by removing the wage/property limitation. Run the numbers before you commit — the deduction can help or hurt depending on which side of the threshold you land.

If you are below the threshold, the full write-off reduces QBI dollar-for-dollar, which means the 20% QBI deduction on the equipment amount is lost. The effective cost of the write-off is not just the tax rate — it is the tax rate minus 20% of the deduction amount. Take a contractor in the 24% bracket. The contractor takes a $50,000 Section 179 deduction. That saves $12,000 in income tax. But it also shrinks QBI by $50,000. The QBI deduction on that amount is 20%. That costs $10,000 in lost QBI deduction. The net savings is $2,000. That is not a reason to skip the deduction, but it is a reason to understand the real savings before you make the purchase.

For 2026, the QBI minimum deduction is $400 when you have at least $1,000 of active QBI, and the rate stays 20% (IRC §199A(i)). This floor matters for contractors who use aggressive expensing to drive business income very low but still have some active QBI remaining.

What records do you need for equipment depreciation?

Every equipment deduction must meet the ordinary and necessary test. For equipment, that means the purchase has a real business purpose. A skid steer for a landscaping contractor is clearly ordinary and necessary. A luxury sedan for a concrete crew is not.

The records you need for each equipment purchase:

• Purchase receipt or invoice showing the cost, date, and seller.
• Date the equipment was placed in service — the day it was ready and available for business use, not the purchase date or delivery date.
• Percentage of business use if the equipment is also used personally. Section 179 and bonus depreciation require more than 50% business use. If business use drops to 50% or less in a later year, you must recapture the excess deduction.
• Financing documents if you borrowed to buy the equipment. You can depreciate or expense the full purchase price even if you financed it — you do not have to wait until the loan is paid off.
• Form 4562 if you elect Section 179 or claim bonus depreciation. MACRS depreciation is also reported on Form 4562.

If you are buying smaller tools and equipment rather than major machinery, the rules are the same but the practical approach differs. A $800 nail gun and a $45,000 excavator follow the same deduction logic — the tools and equipment write-off guide covers how to handle smaller purchases efficiently. The broader contractor tax write-offs checklist puts equipment in context with everything else you can deduct.

One practical note on timing: our standing advice to trade contractors is to sweep 25 to 30 cents of every net dollar into a separate tax account the day you take the draw. A big equipment purchase can create a large deduction that reduces your tax bill, but if you financed the purchase, you still have loan payments coming out of cash flow. The deduction helps on the tax return, but the cash has already left your bank account for the loan. Plan the purchase around the business need first, the tax benefit second.

Common questions about contractor equipment depreciation

If you are planning a major equipment purchase and want to model the tax impact before you commit, the best next step is to get the numbers in front of someone who can run the math for your specific situation. Visit our contractor tax planning hub for the full picture, or book a strategy session with our office. We will look at your income, your entity, and the equipment you are considering — and tell you whether to expense it, depreciate it, or split the difference.