Originally published in Manufacturer, ARB’s Manufacturing Industry newsletter.
Manufacturing is a capital-intensive business. So, if you’re investing in equipment, plant improvements or other depreciable property, take full advantage of available tax incentives. These include Section 179 expensing and bonus depreciation.
Sec. 179 Expensing
Under Sec. 179, manufacturers can deduct 100% of the cost of eligible assets in the first year they’re placed in service rather than writing off those costs over several years (subject to the limits discussed below). Eligible assets include most business equipment, machinery and office furniture, vehicles, and off-the-shelf computer software. Used assets may also qualify if they’re new to the taxpayer (you or your business entity).
Qualified improvement property (QIP) is also eligible for Sec. 179 expensing. QIP refers to certain improvements to the interior of an existing commercial building, such as the installation or replacement of drywall, ceilings, interior doors, fire protection, mechanical, electrical and plumbing. It doesn’t include improvements attributable to elevators or escalators, the building’s internal structural framework, or enlargement of the building.
Sec. 179 expensing isn’t unlimited, however. First, there’s a cap on the total amount you can write off each year ($1.25 million in 2025). In addition, the expensing deduction is gradually phased out at certain spending levels.
The amount you can write off is reduced, on a dollar-for-dollar basis, to the extent your total investment in qualifying property during the year exceeds a specified threshold ($3.13 million in 2025). For example, if you spend $4 million on eligible assets in 2025, the amount you can elect to expense under Sec. 179 is reduced by $870,000 ($4 million – $3.13 million) to only $380,000 ($1.25 million – $870,000). The deduction is eliminated once spending on eligible assets for the year reaches $4,380,000.
Regardless of the applicable limit on Sec. 179 expensing, your deduction can’t exceed your taxable income for the year. However, you can carry forward the disallowed amount and deduct it in future tax years — or claim it as bonus depreciation (discussed below), which isn’t subject to income limits or phaseouts.
Bonus Depreciation
Bonus depreciation is another option for deducting the cost of equipment, machinery, furniture, vehicles, off-the-shelf software and QIP (including certain used property). A few years ago, under a Tax Cuts and Jobs Act (TCJA) provision, bonus depreciation allowed you to deduct up to 100% of the cost of eligible property in the first year it was placed in service. The TCJA reduced bonus depreciation to:
- 80% for property placed in service in 2023,
- 60% for 2024, and
- 40% for 2025.
Unless Congress changes the law, bonus depreciation will be reduced to 20% in 2026 and then eliminated altogether for property placed in service after 2026.
Using Both Incentives in the Same Year
It’s possible to claim Sec. 179 expensing and bonus depreciation in the same year if they’re not used for the same costs. Typically, manufacturers claim the maximum Sec. 179 expensing election before claiming bonus depreciation. That’s because Sec. 179 expensing is more flexible.
For example, Sec. 179 allows you to pick and choose which costs to expense. Conversely, you’re required to claim bonus depreciation for all asset purchases that fall into a certain class.
Consider a Cost Segregation Study
If you’re acquiring, constructing or substantially improving a manufacturing facility, a cost segregation study can generate significant tax savings. These studies identify costs that can be reallocated to asset classes with shorter depreciable lives. This, in turn, can accelerate regular depreciation deductions and also enhance Sec. 179 expensing and bonus depreciation benefits.
For example, commercial property is usually depreciated over a lengthy 39-year period. However, some property may be classified as five-, seven-, or 15-year property eligible for accelerated depreciation methods. IRS regulations generally define “personal property” as tangible depreciable property other than buildings and their structural components.
Beware of Potential Tax Traps
Despite the significant potential benefits of Section 179 expensing and bonus depreciation, forgoing these benefits may sometimes be a better strategy. In some situations, Sec. 179 expensing or claiming bonus depreciation can lead to tax traps. Examples include:
Planning to sell a building containing qualified improvement property (QIP). Expensing these improvements or claiming bonus depreciation may cost you. Your gain on the sale attributable to these write-offs will be taxable at ordinary income tax rates as high as 37%. On the other hand, if you take regular depreciation for QIP, any long-term gain attributable to these deductions will be taxed at a top federal rate of 25%.
Claiming a QBI deduction. This deduction generally allows you to deduct up to 20% of your QBI from eligible pass-through entities, such as partnerships, limited liability companies or sole proprietorships. The deduction is limited to 20% of your taxable income. Expensing or bonus depreciation reduces your taxable income, which reduces your QBI deduction. Thus, you may benefit from only 80% of the deduction.
Also, if you expect your tax rate to increase or you’ll move into a higher tax bracket, depreciation deductions may be more valuable in the future. So, you may be better off forgoing first-year expensing or bonus depreciation and deferring those write-offs to years when they’ll be most beneficial.
Look at the Big Picture
Sec. 179 expensing and bonus depreciation can offer substantial tax benefits. But consider these benefits in light of your overall tax picture, including your state’s tax rules. For example, it may make sense to opt out of Sec. 179 expensing or bonus depreciation to maximize the benefits of a state investment tax credit. Contact your tax advisor for more information.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Manufacturing Team Spotlight
Holly Ferguson is a principal at ARB and the Practice Leader of the firm’s Accounting & Attest, Manufacturing, and Credit Union Services Teams. She provides industry-specific services for manufacturers, distributors, credit unions, businesses, and nonprofit organizations. Throughout her career, Holly has provided manufacturers with financial reporting consulting services, assisted with transactional accounting and consulting related to business acquisitions/sales, and analyzed implications and strategic implementation of new accounting standards. She is the former Treasurer on the Board of Directors and Finance Committee of the Manufacturers Association of Maine.
