Section 179 and Bonus Depreciation in 2026: What Michigan Business Owners Need to Know Before Buying Equipment

Two Deductions, One Deadline, and a Lot of Money on the Table

According to the National Federation of Independent Business Small Business Economic Trends report, capital expenditures rank among the top three planned investments for small business owners, yet fewer than 40% of those owners say they fully understand the accelerated depreciation rules available to them. That gap is expensive.

If you are a Michigan contractor, restaurateur, or self-employed professional thinking about buying equipment before year end, you have access to two powerful federal deductions: Section 179 (the IRS rule that lets businesses deduct the full cost of qualifying equipment in the year they buy it, rather than spreading the deduction over several years) and bonus depreciation (a separate rule that allows an additional first-year deduction on the remaining cost basis). They are distinct tools with different mechanics, different limits, and different consequences when you stack them.

Both deductions share one hard constraint: the equipment must be placed in service by December 31, 2026. That deadline is absolute. Michigan adds a state-level wrinkle that federal-only planning misses entirely.

This article covers both deductions in plain numbers, explains the deadline precisely, flags the vehicle rules that catch contractors off guard, and explains why your Michigan state tax bill may not look like your federal return.

Section 179 in 2026: The Numbers You Actually Need

The Section 179 deduction limit for 2026 is $1,220,000. That number is adjusted annually for inflation by the IRS, so it has climbed steadily from $1,160,000 in 2024. For most Michigan small businesses, it is effectively unlimited, because the phase-out threshold, the point at which the deduction begins to shrink dollar-for-dollar, does not kick in until total equipment purchases for the year exceed $3,050,000. If you are buying a $180,000 CNC machine or a $60,000 restaurant hood system, the cap is not your problem.

The rule that does matter: Section 179 cannot reduce your taxable income below zero. It can bring your federal tax bill down to nothing for the year, but it cannot create a loss that carries into future years. If your net business income before the deduction is $90,000, your Section 179 deduction is capped at $90,000 for this year, and any unused amount carries forward.

Qualifying assets include tangible personal property (machinery, equipment, computers, office furniture), off-the-shelf software, and certain improvements to nonresidential real property, specifically qualified improvement property such as roofs, HVAC systems, fire protection systems, and security systems. What does not qualify: land, buildings, and most vehicles, which fall under a separate and more restrictive set of rules covered below.

The IRS Statistics of Income data from tax year 2021 show that businesses collectively claimed over $500 billion in combined depreciation deductions, with Section 179 elections concentrated heavily among pass-through entities, S-corporations, partnerships, and sole proprietors. That describes the majority of Michigan contractors and restaurateurs reading this article.

Bonus Depreciation in 2026: 20% and Falling

Bonus depreciation is not the same deduction as Section 179, and the two are not interchangeable. Under the Tax Cuts and Jobs Act phase-down schedule, bonus depreciation is 20% for property placed in service in calendar year 2026. That is down from 60% in 2024 and 40% in 2025. In 2027, it is scheduled to drop to zero, unless Congress passes legislation to extend or restore it.

Legislative efforts to restore 100% bonus depreciation, most notably the Tax Relief for American Families and Workers Act, have stalled in the Senate as of mid-2026. Plan around 20%. Do not wait for a rescue that may not arrive before December 31.

Bonus depreciation has one meaningful advantage over Section 179: it can create a net operating loss (NOL, a deduction that exceeds your income for the year and carries forward to reduce tax in future profitable years). If your business has a lean year and you want to front-load a large deduction, bonus depreciation is the tool that allows that.

In practice, the standard approach is to apply Section 179 first, then apply bonus depreciation to the remaining cost basis. But the decision about whether to use Section 179, bonus depreciation, or both, and in what amounts, depends on your current-year income, your income projections, and your Michigan state tax situation. That sequencing decision has real dollar consequences and is worth working through with a CPA before you sign anything.

Placed in Service: The Rule That Trips Everyone Up

"Placed in service" sounds like a simple concept. In practice, it is the rule that costs business owners the deduction more often than any other.

The IRS standard is specific: equipment must be operational and available for use in the business before December 31, 2026. Not ordered. Not paid for. Not sitting in a crate on your loading dock. Operational and available for use.

Here is what does not count: placing an order in November, paying a deposit in December, receiving delivery of equipment that requires installation not yet completed, or taking delivery of a machine that is missing a component and cannot run. All of those fall short.

Here is what the IRS expects to see in your records if the deduction is ever questioned: the delivery receipt showing the date equipment arrived, installation records or a contractor invoice showing completion date, photos with timestamps showing the equipment in place and operational, and the first job ticket, work order, or invoice in which the equipment was actually used in the business.

If you are planning a December purchase, build in real time for installation and documentation. A piece of equipment delivered on December 28 that requires a two-day setup is at genuine risk if anything delays the installer. The December 31 deadline does not bend for supply chain problems or a busy installation schedule.

Trucks, Vans, and the SUV Cap: What Contractors Really Need to Know

Vehicles have their own rules under Section 280F, and the details matter considerably for contractors and tradespeople whose most expensive business purchase is often a truck.

Heavy vehicles with a gross vehicle weight rating (GVWR) over 6,000 pounds are subject to separate treatment. Here is where the distinction gets important: SUVs over 6,000 lbs are subject to a Section 179 deduction cap of $30,500 for 2026. That is not a typo. A $75,000 SUV used entirely for business generates a maximum Section 179 deduction of $30,500 under these rules.

Full-size pickups and cargo vans over 6,000 lbs that are not classified as SUVs are not subject to this cap. A three-quarter-ton pickup used entirely for business can be fully deducted up to the standard Section 179 limit. The IRS definition of SUV matters here, and it is worth confirming how your specific vehicle is classified before you assume the favorable treatment applies.

Regardless of vehicle type, the 50% business-use threshold is non-negotiable. If a vehicle is used less than 50% for business purposes, it does not qualify for Section 179 or bonus depreciation at all and must be depreciated under the Alternative Depreciation System (ADS), which is slower and less favorable. If business use drops below 50% in a later year after you have already taken accelerated deductions, depreciation recapture under Section 1245 applies, meaning some of that deduction comes back as taxable income.

Keep a mileage log from the first day of use. For more on the vehicle deduction rules that hold up under IRS scrutiny, the documentation standards are worth reviewing before you drive the truck off the lot.

Michigan Does Not Always Follow Federal Rules: The State Tax Trap

This is the section most online guides skip, and it is the one most likely to produce an unwelcome surprise when you file.

Michigan partially conforms to federal depreciation rules, but it has historically required addback adjustments for bonus depreciation in certain tax years. What that means in plain terms: a deduction you took on your federal return may not be fully deductible on your Michigan Corporate Income Tax or Michigan Business Tax return. The state may require you to add back a portion of the bonus depreciation, spread the deduction over a longer period, or apply different rules entirely depending on the year and the type of asset.

A business owner who does all of their planning using federal numbers, and many do, may materially underestimate their Michigan state tax liability. The federal return showing a large Section 179 or bonus depreciation deduction does not automatically translate to the same result at the state level.

If you are buying equipment and counting on those deductions to manage your tax bill, you need both a federal and a Michigan state depreciation analysis before you finalize the purchase. There is also the question of Michigan use tax on equipment purchased out of state, which applies to equipment bought from an out-of-state vendor who did not collect Michigan sales tax.

If you are planning a significant equipment purchase this fall, this is worth a conversation with your CPA before you sign.

Section 179 vs. Bonus Depreciation: Which One Should You Use?

The honest answer is that the right choice depends on your specific numbers, and a general article cannot make that call for you. But here is the framework.

Section 179 is the better tool when you have substantial taxable income you want to eliminate in the current year. It reduces your tax bill immediately and is straightforward to apply. The limit is that it cannot push you below zero, so it does not help if you are already in a low-income year.

Bonus depreciation is the better tool when you want to carry a loss forward into future years, when your current-year income is already low, or when you are buying assets that do not qualify for Section 179 (including certain property that qualifies for bonus depreciation but not Section 179). At 20% for 2026, the benefit is more modest than it was in prior years, but it is still real money on a large purchase.

Stacking both is the standard approach for large purchases: apply Section 179 to reduce taxable income to zero, then apply bonus depreciation to the remaining basis to generate the carryforward NOL. Whether that stacking approach serves you depends on reviewing your taxable income projections before making a large purchase and on how your business entity structure affects the tax math. An S-corporation owner, a sole proprietor, and a C-corporation face different constraints with each of these deductions.

The QBI deduction (the 20% deduction for qualified business income available to pass-through entities under Section 199A) adds another layer, because large depreciation deductions reduce the income base on which the QBI deduction is calculated. Optimizing one deduction can quietly reduce another.

This is not a problem to solve with a spreadsheet alone. The interactions between Section 179, bonus depreciation, the QBI deduction, and Michigan state conformity rules are a planning conversation, not a calculation.

Your Next Step Before December 31

Here is a quick-reference summary of the rules covered above:

• Section 179 limit: $1,220,000 for 2026, cannot create a net operating loss
• Bonus depreciation: 20% for 2026, can create an NOL, drops to 0% in 2027 under current law
• Placed in service deadline: December 31, 2026, equipment must be operational and in use, not just ordered or delivered
• SUV cap: $30,500 for 2026 under Section 179, does not apply to full-size pickups or cargo vans over 6,000 lbs
• Business use requirement: More than 50% for Section 179 or bonus depreciation to apply
• Michigan conformity: Partial, run both federal and state analyses before finalizing

If you are considering an equipment purchase this quarter, the time to plan is before the purchase order goes out, not in February when the receipts are already in a folder. Review the high-value year-end tax moves that have hard deadlines before December and think through what adjusting your Q4 estimated tax payment after a large equipment deduction looks like for your specific situation.

The December 31 placed-in-service deadline is the hard constraint that makes acting now matter. Walk through the federal and Michigan state numbers with your CPA before the purchase order goes out.