Business Tax Preparation · Business expenses, deductions and credits

Depreciation, amortization, IRC Section 179, depletion and bonus depreciation

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

Four separate cost recovery regimes sit in this topic, and they interact in a fixed order. Two of them changed materially in July 2025 and one of them is stated wrongly in nearly every source written before then.

The rule

Expensing. $2,560,000 — the aggregate cost of IRC § 179 property a taxpayer may elect to expense for a taxable year beginning in 2026^TY2026 (IRC § 179(b)(1), Rev. Proc. 2025-32 § 3.24), reduced where $4,090,000 — the 2026 limitation is reduced, but not below zero, by the amount by which the cost of IRC § 179 property placed in service during the year exceeds this figure^TY2026 (IRC § 179(b)(2)), and capped by the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026 (IRC § 179(b)(3)). For sport utility vehicles, $32,000 — the cost of any sport utility vehicle that may be taken into account under IRC § 179 for a taxable year beginning in 2026^TY2026 (IRC § 179(b)(5)(A)).

Bonus depreciation. 100 percent of the adjusted basis of qualified property, with the basis reduced by that allowance before any other depreciation is computed^TY2026 (IRC § 168(k)(1)), and used property qualifies, provided it was not used by the taxpayer at any time before the acquisition and the acquisition meets the IRC § 179(d)(2)(A), (B), (C) and (d)(3) conditions on related parties and carryover basis^TY2026 (IRC § 168(k)(2)(E)(i)). It is now permanent — Pub. L. 119-21 § 70301(b)(1)(A) substituted "100 percent" for "the applicable percentage" in IRC § 168(k)(1)(A), § 70301(b)(1)(B) repealed the phase-down table at IRC § 168(k)(6) and IRC § 168(k)(8), and § 70301(a)(1) struck the requirement in IRC § 168(k)(2)(A)(iii) that the property be placed in service before 1 January 2027^TY2026.

Start-up costs. amounts paid or incurred in investigating the creation or acquisition of an active trade or business, in creating one, or in a profit-seeking activity before the business begins in anticipation of it becoming active — and only where the amount would have been deductible if incurred by an existing business in the same field^TY2026 (IRC § 195(c)(1)), but an amount for which a deduction is allowable under IRC § 163(a), § 164, § 174 or § 174A is not a start-up expenditure^TY2026. The taxpayer may elect $5,000, reduced but not below zero by the amount by which start-up expenditures exceed $50,000, deductible in the year the active trade or business begins^TY2026 (IRC § 195(b)(1)(A)), and then the remainder is deducted ratably over the 180-month period beginning with the month in which the active trade or business begins^TY2026 (IRC § 195(b)(1)(B)).

Depletion. a reasonable allowance for depletion is available for mines, oil and gas wells, other natural deposits, and timber, and the estimate of recoverable units is revised as operations show it to be wrong^TY2026 (IRC § 611(a)). Percentage depletion is narrower: percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026 (IRC § 613(a), (b)), and the percentage depletion allowance may not exceed 50 percent of taxable income from the property, computed without the depletion allowance and without any IRC § 199A deduction — 100 percent in the case of oil and gas properties — and may never be less than cost depletion^TY2026 (IRC § 613(a)). For oil and gas, except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026 (IRC § 613A(a)) — with the exception that 15 percent, available only to independent producers and royalty owners and only on average daily production up to the depletable oil or natural gas quantity^TY2026 (IRC § 613A(c)(1)).

Current figures

Item	Rule	Authority
Expensing limit, 2026	$2,560,000 — the aggregate cost of IRC § 179 property a taxpayer may elect to expense for a taxable year beginning in 2026^TY2026	IRC § 179(b)(1), Rev. Proc. 2025-32 § 3.24
Phase-out threshold, 2026	$4,090,000 — the 2026 limitation is reduced, but not below zero, by the amount by which the cost of IRC § 179 property placed in service during the year exceeds this figure^TY2026	IRC § 179(b)(2), Rev. Proc. 2025-32 § 3.24
Sport utility vehicles, 2026	$32,000 — the cost of any sport utility vehicle that may be taken into account under IRC § 179 for a taxable year beginning in 2026^TY2026	IRC § 179(b)(5)(A), Rev. Proc. 2025-32 § 3.24
Taxable income cap	the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026	IRC § 179(b)(3)
Bonus allowance	100 percent of the adjusted basis of qualified property, with the basis reduced by that allowance before any other depreciation is computed^TY2026	IRC § 168(k)(1)
Now permanent	permanent — Pub. L. 119-21 § 70301(b)(1)(A) substituted "100 percent" for "the applicable percentage" in IRC § 168(k)(1)(A), § 70301(b)(1)(B) repealed the phase-down table at IRC § 168(k)(6) and IRC § 168(k)(8), and § 70301(a)(1) struck the requirement in IRC § 168(k)(2)(A)(iii) that the property be placed in service before 1 January 2027^TY2026	Pub. L. 119-21 § 70301
Used property	used property qualifies, provided it was not used by the taxpayer at any time before the acquisition and the acquisition meets the IRC § 179(d)(2)(A), (B), (C) and (d)(3) conditions on related parties and carryover basis^TY2026	IRC § 168(k)(2)(E)(i)
One-year transition election	for the first taxable year ending after 19 January 2025 only, a taxpayer may elect to apply 40 percent instead of 100 percent — 60 percent for longer production period property and certain aircraft^TY2026	IRC § 168(k)(10)
Start-up expenditure, defined	amounts paid or incurred in investigating the creation or acquisition of an active trade or business, in creating one, or in a profit-seeking activity before the business begins in anticipation of it becoming active — and only where the amount would have been deductible if incurred by an existing business in the same field^TY2026	IRC § 195(c)(1)
What is excluded	an amount for which a deduction is allowable under IRC § 163(a), § 164, § 174 or § 174A is not a start-up expenditure^TY2026	IRC § 195(c)(1)
Current deduction	$5,000, reduced but not below zero by the amount by which start-up expenditures exceed $50,000, deductible in the year the active trade or business begins^TY2026	IRC § 195(b)(1)(A)
The remainder	the remainder is deducted ratably over the 180-month period beginning with the month in which the active trade or business begins^TY2026	IRC § 195(b)(1)(B)
Depletion, scope	a reasonable allowance for depletion is available for mines, oil and gas wells, other natural deposits, and timber, and the estimate of recoverable units is revised as operations show it to be wrong^TY2026	IRC § 611(a)
Percentage depletion, scope	percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026	IRC § 613(a), (b)
Its ceiling	the percentage depletion allowance may not exceed 50 percent of taxable income from the property, computed without the depletion allowance and without any IRC § 199A deduction — 100 percent in the case of oil and gas properties — and may never be less than cost depletion^TY2026	IRC § 613(a)
Oil and gas, the default	except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026	IRC § 613A(a)
Oil and gas, the exception	15 percent, available only to independent producers and royalty owners and only on average daily production up to the depletable oil or natural gas quantity^TY2026	IRC § 613A(c)(1)

How it works in practice

Take the recovery provisions in order. IRC § 179 first, because the election is made against the cost of the property; then bonus depreciation on the basis that remains; then ordinary depreciation on what is left. Reversing the first two changes the answer, because the IRC § 179 election is capped by the taxable income of the business while bonus depreciation is not.

The taxable income cap is the one people forget. the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026 (IRC § 179(b)(3)). A business with a loss gets no IRC § 179 deduction at all in that year, however much it spent — the amount carries forward instead. Bonus depreciation has no such limit and will happily create or enlarge a loss, which is why a loss-making business that wanted IRC § 179 gets bonus depreciation instead and reaches a different answer.

The phase-out is dollar for dollar, not proportional. $4,090,000 — the 2026 limitation is reduced, but not below zero, by the amount by which the cost of IRC § 179 property placed in service during the year exceeds this figure^TY2026 (IRC § 179(b)(2)). Spend enough above the threshold and the limitation reaches zero, so IRC § 179 is a small-business provision by design.

Bonus depreciation reaches used property, on conditions. used property qualifies, provided it was not used by the taxpayer at any time before the acquisition and the acquisition meets the IRC § 179(d)(2)(A), (B), (C) and (d)(3) conditions on related parties and carryover basis^TY2026 (IRC § 168(k)(2)(E)(i)). The property must not have been used by this taxpayer before, and the acquisition must not be from a related party or take a carryover basis. So buying a competitor’s second-hand machinery qualifies; buying your own leased machine at the end of the lease does not.

Start-up costs are not organizational costs. IRC § 195 covers investigating and creating an active trade or business; IRC § 248 covers the cost of organising a corporation — its charter, its by-laws, the legal and accounting fees of incorporation, the organisational meetings. The two have parallel structures and matching figures, and they are separately elected. Legal fees for drafting the articles are IRC § 248; market research before opening is IRC § 195.

The start-up definition has a filter and an exclusion. amounts paid or incurred in investigating the creation or acquisition of an active trade or business, in creating one, or in a profit-seeking activity before the business begins in anticipation of it becoming active — and only where the amount would have been deductible if incurred by an existing business in the same field^TY2026 (IRC § 195(c)(1)) — the amount must be one that an existing business in the same field could have deducted, so a capital expenditure incurred before opening is still capital. an amount for which a deduction is allowable under IRC § 163(a), § 164, § 174 or § 174A is not a start-up expenditure^TY2026: interest, taxes and research expenditures are governed by their own sections and never become start-up costs.

Depletion divides into cost and percentage, and percentage is the narrow one. a reasonable allowance for depletion is available for mines, oil and gas wells, other natural deposits, and timber, and the estimate of recoverable units is revised as operations show it to be wrong^TY2026 (IRC § 611(a)) covers timber along with everything else. But percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026 (IRC § 613(a), (b)) — timber is absent from the IRC § 613(b) list, so a timber owner has cost depletion only. Percentage depletion is also floored by cost depletion: IRC § 613(a) closes by providing that the allowance shall in no case be less than it would be computed without reference to that section.

Oil and gas reverse the default. except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026 (IRC § 613A(a)). Percentage depletion is denied for an oil or gas well unless the taxpayer comes within an exception, and the one that matters is 15 percent, available only to independent producers and royalty owners and only on average daily production up to the depletable oil or natural gas quantity^TY2026 (IRC § 613A(c)(1)). An integrated producer gets cost depletion only, and even an independent producer gets the statutory rate only on production up to the depletable quantity.

The equipment purchase, in order

Ockbrook Engineering buys $900,000 of new machinery and places it in service in 2026. Its taxable income from the business before any cost recovery is $340,000.

IRC § 179 comes first. The 2026 limitation is $2,560,000 — the aggregate cost of IRC § 179 property a taxpayer may elect to expense for a taxable year beginning in 2026^TY2026, and total purchases are well below the phase-out threshold, so nothing is lost there. But the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026 caps the deduction at $340,000. The company elects that amount; the unused portion is not lost, it carries forward.

Bonus depreciation runs on the remaining basis of $560,000. 100 percent of the adjusted basis of qualified property, with the basis reduced by that allowance before any other depreciation is computed^TY2026 (IRC § 168(k)(1)) allows all of it, and there is no taxable income limit, so the deduction is $560,000.

Total cost recovery is $900,000, and the business now has a $560,000 loss. Note the shape: the IRC § 179 election was constrained and bonus depreciation was not, and reversing the order would have produced a smaller total, because bonus depreciation taken first would have left nothing for IRC § 179 to be elected against.

Fifty-three thousand pounds of preparation

Chetwode Foods spends $53,000 before opening: $31,000 on market research and site visits, $14,000 on training staff before the doors open, and $8,000 in legal fees for drafting the articles of incorporation. It opens for business on 1 October 2026.

The $8,000 of incorporation legal fees is an organizational expenditure under IRC § 248, not a start-up cost. It has its own election and its own $5,000 figure, and none of it enters the IRC § 195 computation.

That leaves $45,000 of start-up expenditure. Because it does not exceed $50,000, $5,000, reduced but not below zero by the amount by which start-up expenditures exceed $50,000, deductible in the year the active trade or business begins^TY2026 (IRC § 195(b)(1)(A)) gives the full $5,000 in 2026, and the remainder is deducted ratably over the 180-month period beginning with the month in which the active trade or business begins^TY2026 (IRC § 195(b)(1)(B)) spreads the remaining $40,000 over 180 months from October — so three months of amortisation, or about $667, in 2026 as well.

Now suppose the market research had cost $39,000 instead, bringing start-up expenditure to $53,000. The current deduction falls to $5,000 less $3,000, or $2,000, and $51,000 is amortised. The dollar-for-dollar reduction bites only on the amount above $50,000, and reaches zero at $55,000.

Three depletion answers on similar facts

Three businesses each have $100,000 of gross income from a property in the United States.

A timber company. percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026 — timber is in IRC § 611(a) but not in the IRC § 613(b) list, so percentage depletion is unavailable. Its deduction is cost depletion: the adjusted basis of the timber, divided by the estimated recoverable units, times the units cut.

A uranium mine. Uranium is named in IRC § 613(b)(1)(A) at 22 percent, so the allowance is $22,000, subject to the taxable income ceiling in the percentage depletion allowance may not exceed 50 percent of taxable income from the property, computed without the depletion allowance and without any IRC § 199A deduction — 100 percent in the case of oil and gas properties — and may never be less than cost depletion^TY2026 and never less than cost depletion.

An oil producer. except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026 (IRC § 613A(a)) denies percentage depletion for an oil or gas well as the starting point. If it is an independent producer or royalty owner within IRC § 613A(c), 15 percent, available only to independent producers and royalty owners and only on average daily production up to the depletable oil or natural gas quantity^TY2026 applies, giving $15,000 — but only on production up to the depletable quantity. If it is an integrated producer, the answer is cost depletion and the statutory rate never enters the computation.

The same $100,000 of gross income produces three different regimes, and in one of them the percentage rate is a distractor.

Traps.

IRC § 179 has a taxable income limit and bonus depreciation does not. {fig:depr.179_income_limit} (IRC § 179(b)(3)). A loss-making business gets no IRC § 179 deduction that year; the amount carries forward.

Percentage depletion never applies to timber. {fig:depr.percentage_scope} (IRC § 613(a), (b)). Timber gets cost depletion only, however the question is phrased.

Percentage depletion is denied for oil and gas by default. {fig:depr.oil_gas_default} (IRC § 613A(a)). The statutory rate belongs to independent producers and royalty owners under IRC § 613A(c), not to every oil company.

Start-up costs and organizational costs are different elections. IRC § 195 and IRC § 248 have parallel wording and matching figures, and each has its own current deduction and its own phase-out. They are not pooled.

An amount deductible under another section is never a start-up cost. {fig:depr.startup_excluded} (IRC § 195(c)(1)). Interest, taxes and research expenditures are outside the section.

The bonus phase-down is gone. {fig:depr.bonus_permanent}. Any source giving a descending schedule of percentages across 2023 to 2026 is describing a table that Pub. L. 119-21 § 70301(b)(1)(B) repealed.

How this has changed

Bonus depreciation is permanent at its full rate, and this is the single most commonly misstated rule in the topic. permanent — Pub. L. 119-21 § 70301(b)(1)(A) substituted "100 percent" for "the applicable percentage" in IRC § 168(k)(1)(A), § 70301(b)(1)(B) repealed the phase-down table at IRC § 168(k)(6) and IRC § 168(k)(8), and § 70301(a)(1) struck the requirement in IRC § 168(k)(2)(A)(iii) that the property be placed in service before 1 January 2027^TY2026. Three separate amendments in Pub. L. 119-21 § 70301 did it: § 70301(b)(1)(A) replaced “the applicable percentage” in IRC § 168(k)(1)(A) with a fixed figure; § 70301(b)(1)(B) repealed IRC § 168(k)(6), which held the phase-down table, and IRC § 168(k)(8); and § 70301(a)(1) struck IRC § 168(k)(2)(A)(iii), which had required the property to be placed in service before 1 January 2027. What remains is a flat allowance with no expiry.

One transitional provision survives and is worth knowing because it explains why 2025 returns look inconsistent. for the first taxable year ending after 19 January 2025 only, a taxpayer may elect to apply 40 percent instead of 100 percent — 60 percent for longer production period property and certain aircraft^TY2026 (IRC § 168(k)(10)). For a calendar-year taxpayer that election belonged to 2025 and is not available in 2026.

The IRC § 179 figures were raised and then indexed. Pub. L. 119-21 § 70306 raised the statutory amounts in IRC § 179(b)(1) and (b)(2). Rev. Proc. 2025-32 § 3.24 then gives the 2026 figures: $2,560,000 — the aggregate cost of IRC § 179 property a taxpayer may elect to expense for a taxable year beginning in 2026^TY2026, phasing out from $4,090,000 — the 2026 limitation is reduced, but not below zero, by the amount by which the cost of IRC § 179 property placed in service during the year exceeds this figure^TY2026, with $32,000 — the cost of any sport utility vehicle that may be taken into account under IRC § 179 for a taxable year beginning in 2026^TY2026 for a sport utility vehicle. Material giving figures near the million mark is describing years before 2025.

Research expenditures left the start-up definition intact but changed the alternative. IRC § 195(c)(1) has always excluded amounts deductible under IRC § 174; it now reads “under section 163(a), 164, 174, or 174A.” Pub. L. 119-21 § 70302(a) added IRC § 174A, which allows a current deduction for domestic research or experimental expenditures. So pre-opening research is still outside IRC § 195, but the section it falls into now permits an immediate deduction rather than the mandatory capitalisation that applied from 2022.

Exam focus

Expect a computation that requires you to apply IRC § 179 and bonus depreciation in the right order, and expect the taxable income limitation to be the thing being tested. If the facts give you the business’s income, that is the signal.

Expect a start-up cost computation with a figure above the phase-out threshold, and remember the reduction is dollar for dollar on the excess and that the balance goes over 180 months from the month the business begins — which usually means a part-year amortisation in the opening year.

For depletion, learn three facts and you will answer most questions: percentage depletion does not reach timber, oil and gas start from a denial in IRC § 613A(a), and percentage depletion can never be less than cost depletion.

Finally, treat any pre-2025 statement about bonus depreciation percentages as wrong until checked. The phase-down table was repealed, not paused.

Check yourself

1. A business places $700,000 of qualifying equipment in service and has $120,000 of taxable income from the business. What is the maximum IRC § 179 deduction?

Answer: $120,000. The dollar limitation and phase-out do not bite at this level, but the deduction, after the dollar limitation and the phase-out, may not exceed the aggregate taxable income derived from the active conduct of any trade or business, computed without the IRC § 179 deduction itself; the disallowed amount carries forward^TY2026 (IRC § 179(b)(3)) caps the deduction at the taxable income from the active conduct of the business. The disallowed amount carries forward, and bonus depreciation is available on the remaining $580,000 of basis without any income limit.

2. A company spends $56,000 investigating and creating a new active business. How much may it deduct in the opening year under IRC § 195(b)(1)(A)?

Answer: Nothing under that subparagraph. $5,000, reduced but not below zero by the amount by which start-up expenditures exceed $50,000, deductible in the year the active trade or business begins^TY2026 — the current deduction is reduced dollar for dollar by the $6,000 excess over the threshold, which takes it below zero and therefore to zero. The whole $56,000 is amortised over 180 months.

3. A taxpayer buys a used lathe from an unrelated seller. Does it qualify for bonus depreciation?

Answer: Yes, if it meets the conditions. used property qualifies, provided it was not used by the taxpayer at any time before the acquisition and the acquisition meets the IRC § 179(d)(2)(A), (B), (C) and (d)(3) conditions on related parties and carryover basis^TY2026 (IRC § 168(k)(2)(E)(i)) — the property must not have been used by this taxpayer before, and the acquisition must not be from a related party or take a carryover basis. Second-hand property from an unrelated seller satisfies both.

4. A timber company has $400,000 of gross income from its stand. May it use percentage depletion?

Answer: No. percentage depletion applies only to the mines, wells and other natural deposits listed in IRC § 613(b) — a list that does not include timber, so timber is limited to cost depletion^TY2026 (IRC § 613(a), (b)) — percentage depletion applies only to the deposits listed in IRC § 613(b), and timber is not among them, although IRC § 611(a) does allow it a depletion deduction. Its allowance is cost depletion.

5. An integrated oil company has $2,000,000 of gross income from a producing well. What is its percentage depletion?

Answer: None. except as IRC § 613A otherwise provides, the depletion allowance for an oil or gas well is computed without regard to IRC § 613 — that is, percentage depletion is denied^TY2026 (IRC § 613A(a)) computes the allowance for an oil or gas well without regard to IRC § 613 unless an exception applies, and the exception in IRC § 613A(c) is confined to independent producers and royalty owners. An integrated producer takes cost depletion.

Change log

2026-08-21Initial draft. Sets out the IRC § 179 dollar limitation, phase-out and taxable income cap with the 2026 figures from Rev. Proc. 2025-32, the IRC § 168(k) bonus allowance and the conditions used property must meet, the IRC § 195 start-up rules and their interaction with IRC § 248, and the depletion regime under IRC §§ 611, 613 and 613A. Records that Pub. L. 119-21 § 70301 made bonus depreciation permanent at 100 percent by striking the phase-down table and the placed-in-service deadline.