One year after the One Big Beautiful Bill Act became law on July 4, 2025, Ohio Valley merit shop contractors face a fundamentally changed tax landscape for equipment investments. Understanding when to use Section 179 versus 100% bonus depreciation determines how much capital you preserve for growth and competitive bidding.

Here is the plain-language answer. Both Section 179 and bonus depreciation allow for accelerated tax deductions for asset purchases – letting you immediately deduct the cost of qualifying equipment, heavy vehicles, machinery, and computer software in the same tax year you place that property in service rather than spreading the depreciation deduction across five, seven, or fifteen years. But the two tools work differently, and the difference matters when you are planning a $2 million fleet replacement or a $6 million automation upgrade.

Bonus depreciation is now permanently restored at a 100% bonus depreciation rate for qualified property acquired and placed in service after January 19, 2025, under the bonus depreciation provisions of the One Big Beautiful Bill Act. There is no annual limit on how much qualifying property you can write off. Section 179 limits doubled under the new law to a $2,500,000 maximum deduction (rising to $2,560,000 for 2026 after inflation indexing) with a $4,000,000 investment phase-out threshold ($4,090,000 for 2026). Businesses can deduct up to 100% of capital purchases using these tools in combination – but the mechanics, income requirements, and strategic applications are different enough that the choice between them shapes your cash flow, your banking relationships, and your ability to win work on merit.

The why-now is the law’s one-year anniversary plus IRS Notice 2026-11 interim guidance clarifying acquisition dates, the 10% safe harbor for non-binding contracts, and the elective 40% transitional election rate for the first tax year ending after January 19, 2025. Below is a practical comparison of the two strategies and how merit shop contractors combine them to achieve maximum tax efficiency.

Section 179 vs Bonus Depreciation: Key Differences

The core distinction is control versus scale.

• Section 179 provides a set dollar deduction limit – $2,560,000 in 2026 – that phases out dollar-for-dollar after $4,090,000 in annual equipment purchases. Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software up to that cap. Section 179 allows businesses greater flexibility in choosing which assets to expense because you elect it on an asset-by-asset basis.
• Bonus depreciation allows a 100% deduction for eligible assets with no annual spending caps and can benefit companies with large capital expenditures. There is no income-based phase-out and no ceiling on the total cost of depreciable property you can claim bonus depreciation against.
• Section 179 is limited by business net income and cannot exceed it; it cannot be used to create a net operating loss. If your taxable income from active trades is $1.8 million, your Section 179 deduction stops at $1.8 million, with the excess carried forward to future years. Bonus depreciation can create a net operating loss for businesses, which makes it the more aggressive tool in loss or low-income years.
• Businesses must apply Section 179 before bonus depreciation. IRS rules require the Section 179 deduction to reduce the asset’s basis first; bonus depreciation then applies to the remaining basis of that same property. Businesses can combine Section 179 and bonus depreciation deductions in a single tax year to achieve full first-year expensing.

Many businesses prefer Section 179 for its manageable deductions and bonus depreciation, which provide maximum first-year deductions. Its asset-by-asset election can also apply to certain leasehold improvements. For merit shop contractors in Ohio, Kentucky and Indiana, the right mix depends on annual spending levels, income timing and state conformity rules.

Dollar Limits and Phase-Out Thresholds

Understanding where the numbers cut off – and where they don’t – drives equipment purchase planning and cash flow timing for every tax year.

Section 179 Deduction Limits

In 2026, businesses can deduct up to $2,560,000 under Section 179. Certain leasehold improvements may also qualify when treated as qualified improvement property under the applicable rules. Section 179 limits are adjusted annually for inflation under the permanent provisions of the Big Beautiful Bill Act. The Section 179 deduction limit was $2.5 million for 2025; the 2026 figure reflects the first inflation-indexed increase under the new law.

The phase-out threshold for Section 179 was $4 million in 2025 and will rise to $4,090,000 in 2026. Once your total qualifying property placed in service during the tax year exceeds that threshold, the available deduction drops dollar-for-dollar. If you spend $5 million on equipment, the available Section 179 deduction drops by $910,000 (the amount over $4,090,000), leaving $1,650,000 available.

Complete phase-out occurs at approximately $6,650,000 in annual equipment investments. Businesses spending less than $6.65 million qualify for at least a partial Section 179 deduction in 2026. Above that level, Section 179 provides no tax benefit, and bonus depreciation becomes the only tool for immediate expensing.

Heavy SUVs and certain vehicles with a gross vehicle weight rating between 6,000 and 14,000 pounds carry a separate sublimit of $32,000 under Section 179 for 2026. The remaining purchase price of such property must be recovered through regular depreciation or, if the vehicle qualifies, bonus depreciation.

Bonus Depreciation Provisions and Scope

Bonus depreciation allows a 100% deduction in the first year, with no dollar limit, for qualifying property purchased and placed in service after January 19, 2025. The One Big Beautiful Bill Act permanently reinstated 100% bonus depreciation, reversing the scheduled phase-down under prior law (the Tax Cuts and Jobs Act had reduced the bonus depreciation rate to 40% for 2025 and 20% for 2026 before the new law intervened).

There are no income-based restrictions, no business size limitations, and no phase-out threshold. A contractor spending $12 million on qualified property in a single year can claim bonus depreciation on the entire amount. Bonus depreciation applies to both new and used qualified property, provided the used equipment meets the five statutory acquisition requirements – including that the taxpayer did not previously use such property, the property was not acquired from a related party, and the cost basis is not determined by reference to the seller’s basis.

Bonus depreciation has no annual spending caps and can benefit companies with large capital expenditures – precisely the profile of merit shop contractors scaling into automation, modular building systems, and data-integrated project management tools.

Eligible Property and Acquisition Requirements

IRS Notice 2026-11 provides new guidance on acquisition dates and transitional rules. The notice establishes a 10% safe harbor: if a taxpayer has incurred (on an accrual basis) or paid (on a cash basis) at least 10% of the total contract cost on a non-binding contract, the Internal Revenue Service treats the property as “acquired” on the contract date. This matters for contractors with long-lead-time equipment orders placed before January 19, 2025, who need to establish eligibility under the post-OBBBA bonus depreciation rules. The notice also confirms a transitional election allowing taxpayers making equipment investments in the first tax year ending after January 19, 2025, to elect a 40% bonus depreciation rate instead of 100% – useful when smoothing deductions across tax years beginning in different income environments.

Section 179 Qualifying Assets

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software, including:

• Tangible personal property: construction equipment, heavy machinery, tools, computer equipment, vehicles
• Off-the-shelf computer software used in active business operations
• Qualified improvement property (interior improvements to nonresidential real property already placed in service)
• Certain business vehicles over 6,000 pounds GVWR, subject to the $32,000 sublimit for heavy SUVs

Property must be purchased for business use (greater than 50% business use required) and placed in service during the tax year. Both new and used equipment qualifies for Section 179, provided the acquisition is by purchase – not gift, inheritance, or related-party transfer. Section 179 is elected on Form 4562, filed with the original return or on extension by the due date. Once elected, the decision generally cannot be revoked without Internal Revenue Service consent.

Bonus Depreciation Qualifying Property

Bonus depreciation covers a broader scope of depreciable property:

• Most business property with a recovery period of 20 years or less under MACRS, including machinery, equipment, furniture, tools and certain land improvements
• Water utility property and qualified improvement property (15-year life)
• Computer software (both off-the-shelf and certain other categories)
• The interior portion of nonresidential real property, when properly segregated through cost segregation studies (the building shell itself, with a 39-year recovery period, does not qualify)
• Used equipment qualifies if it meets the “first use” test for the purchasing contractor and satisfies all five acquisition requirements under the Internal Revenue Code

Property acquired after January 19, 2025, and placed in service before year-end qualifies. Taxpayers may elect out of bonus depreciation for an entire class of certain property for that tax year – a strategic choice when state tax treatment or income-smoothing considerations favor spreading the depreciation deduction. The election is made on Form 4562 by the due date, including extensions.

Strategic Timing and Income Considerations

For contractors whose ordinary income swings with project completion schedules, the choice between Section 179 and bonus depreciation is fundamentally a question of income management. Coordinating equipment purchases with WIP schedule timing, milestone billing, and project close-outs determines whether you capture the full tax benefits in the year you need them most.

Section 179 Income Requirements

Section 179’s deduction cannot exceed taxable income from all active trades or businesses. If your firm’s taxable income from operations is $2 million, your Section 179 deduction stops at $2 million – even if you purchased $2,560,000 in qualifying assets. The excess carries forward indefinitely to future tax years when sufficient income exists.

This structure works best for profitable contractors with consistent annual income. It also demands careful coordination with WIP schedule timing and milestone billing: a project completing in January instead of December can shift enough income to change whether Section 179 is fully usable in a given year. Individual taxpayers and pass-through entities (including S corporations common among merit shop firms) must carefully track active business income. This income limitation often matters most for small businesses that want first-year expensing but need enough active income to use the deduction currently.

Bonus Depreciation Flexibility

Bonus depreciation has no taxable income limitations. It can create a net loss that becomes a net operating loss available for carryforward to future years. This makes it the preferred tool for contractors managing lumpy income patterns from large commercial projects – a $4 million equipment purchase in a year with $1 million in taxable income generates a substantial NOL that offsets ordinary income in prior years (to the extent allowed) or future years.

Bonus depreciation allows aggressive equipment purchases during slow periods or market downturns without having to worry about income floors. It supports capital deployment strategies tied to multi-year project pipelines, where you invest ahead of backlog. For contractors addressing workforce needs through automation and modular construction systems, the ability to immediately deduct large percentage investments without income constraints is a decisive advantage.

Combining Both Strategies for Maximum Tax Benefits

IRS rules require applying the Section 179 deduction first, then bonus depreciation on the remaining basis of qualifying property. This ordering creates a powerful layering strategy.

Example calculation: A contractor purchases $3,000,000 in qualifying equipment in 2026. Section 179 allows $2,560,000 of the cost to be absorbed (assuming sufficient active business income). The remaining $440,000 of basis is eligible for 100% bonus depreciation. Result: $3,000,000 fully expensed in year one. Both Section 179 and bonus depreciation allow for accelerated tax deductions for asset purchases, and combining them eliminates any gap.

Large-spend scenario: A contractor investing $5,200,000 in equipment hits the phase-out zone. The Section 179 cap is reduced: $5,200,000 minus the $4,090,000 threshold equals $1,110,000 over; $2,560,000 cap minus $1,110,000 equals $1,450,000 available under Section 179. Bonus depreciation then covers the remaining $3,750,000 of basis at 100%. Full first-year expensing is still achieved – but only if the contractor’s taxable income supports the $1,450,000 Section 179 component.

Over-threshold scenario: At $7,000,000 in annual equipment purchases, Section 179 is completely phased out. Bonus depreciation handles the entire deduction. This is common for firms making significant changes in fleet composition or investing in qualified production property for modular or prefabrication operations.

The strategy works regardless of contractor size or annual revenue. It is particularly effective for contractors investing in automation, modular systems, and data-integrated project management tools – exactly the assets that drive long-term efficiency and competitive advantage in merit shop bidding.

Asset allocation tip: Prioritize Section 179 for assets where it provides the most control – heavy SUVs subject to the $32,000 sublimit, computer software, smaller tools, and vehicles where state conformity may favor Section 179 treatment. Reserve large industrial machinery, modular systems and high-cost automation for bonus depreciation, where no cap or income limitation applies.

OBBBA Planning Integration

Depreciation strategy does not exist in isolation. The One Big Beautiful Bill Act reshaped multiple tax provisions that interact with equipment expensing decisions, and merit shop contractors who plan across all of them capture significantly more tax savings than those who optimize only one.

Section 163(j) interest deduction changes. Under prior law, the business interest expense limitation calculated adjusted taxable income (ATI) on an EBIT basis – meaning depreciation and amortization were not added back, which penalized capital-intensive contractors. The OBBBA permanently restored the add-back of depreciation, amortization, and depletion to ATI for tax years beginning after December 31, 2024. For contractors carrying significant interest expense on equipment financing, project lines or surety facilities, this is a significant change: large depreciation deductions from Section 179 and bonus depreciation now increase ATI, which in turn increases the deductible portion of interest expense. The Treasury Department and IRS have also introduced a new ordering rule under which the interest limitation applies without regard to whether interest would otherwise be capitalized – a nuance worth reviewing with your CPA.

Permanent 20% qualified business income deduction. The OBBBA made the 20% QBI deduction for pass-through entities permanent, which, under prior law, was set to expire. For S corporation and partnership structures common among merit shop firms, accelerated expensing reduces taxable income, while the QBI deduction provides an additional layer of tax savings. Model both effects – reducing taxable income too aggressively can reduce the QBI deduction itself, so side-by-side projections matter.

Clean energy project timing. Certain clean energy tax credit provisions phase out or undergo significant changes mid-2026. Eligibility for certain incentives can also be affected by restrictions on foreign entities under newer clean-energy rules. Contractors with projects involving solar installations, energy-efficient building systems, or qualified production property tied to clean energy should confirm that construction begins before the deadline to capture available tax credit and adoption tax credit incentives. Pairing clean energy work with bonus depreciation on associated equipment can layer multiple tax benefits on a single project. Firms exploring health savings account and direct primary care options should also note the OBBBA’s healthcare-related provisions, which may affect overall compensation paid and tax planning.

Workforce development opportunities. The OBBBA expanded Pell Grant eligibility and now allows 529 plan funds to be used for trade education and apprenticeship programs – a direct response to the workforce need in skilled trades across the Ohio Valley. The temporary above-the-line overtime deduction, up to $12,500 for individuals and $25,000 for married filers through 2028, reduces taxable income for field employees working extended hours on commercial projects. These provisions support workforce retention without increasing the tax burden on compensation paid to craft professionals. Contractors claiming separate incentives for domestic research should model those benefits alongside expensing decisions.

Estate and succession planning. The OBBBA reinstated a roughly $15 million per-person basic exclusion for estate and gift tax effective January 1, 2026. For owners of merit shop firms considering ownership transfers, buy-sell restructuring, or generational succession, the interaction between accelerated equipment depreciation (which affects asset valuations and the entity’s book value) and estate planning is significant. Coordinate with legal, valuation and tax advisors before year-end.

Banking and surety relationships. Before deploying capital based on any depreciation strategy, present your plan to lenders and surety partners. Large first-year deductions change reported income, balance sheet values, and coverage ratios. A clear WIP and backlog narrative – showing how equipment investments connect to contracted work and competitive positioning – prevents surprises that damage bonding capacity or credit terms. Capital expenditure planning should prioritize assets that drive long-term efficiency, and your financial partners need to see that logic before the Form 4562 is filed. Track unrelated compliance items, such as payment app reporting or excise tax exposure, separately so they do not get confused with depreciation planning.

Section 179 vs Bonus Depreciation: Which Should You Choose?

Choose Section 179 first for equipment purchases under $2,560,000 when you have sufficient active business income to absorb the tax deduction. Section 179 allows a maximum deduction of $2.5 million in 2025, rising to $ 2.56 million in 2026. It gives you asset-by-asset control, works well for vehicles and software subject to special rules, and avoids creating a net loss that complicates financial reporting to banks and surety.

Choose bonus depreciation for unlimited equipment spending above Section 179 limits, or when creating strategic tax losses through a net operating loss makes sense for your multi-year income profile. Bonus depreciation allows a 100% deduction for eligible assets – new or used – with no cap on the purchase price and no income floor. It is the right tool for large fleet replacements, automation investments, and any scenario in which Section 179 has been phased out.

Combine both strategies for equipment investments exceeding $2,560,000 to maximize immediate tax benefits. Layer Section 179 on assets where it offers the most control (vehicles, software, tools), then let bonus depreciation handle the rest. This approach works across entity types – whether you operate as an S corporation, partnership, or sole proprietorship.

Coordinate with advisors. Build side-by-side before-and-after tax projections with your CPA. Model scenarios at multiple spending levels ($2 million, $4 million, $6 million-plus) showing the impact on taxable income, net operating loss potential, Section 163(j) interest limitations, state versus federal taxes, and reported income for banking and surety purposes. The proposed regulations and final regulations under the Internal Revenue Code continue to evolve – taxpayers making major capital commitments need professional guidance that accounts for both federal government rules and state conformity in Ohio, Kentucky, and Indiana. Ask your advisors whether adjacent OBBBA items, such as domestic research incentives or new account provisions like Trump Accounts, have any planning relevance outside the depreciation decision. Keep your banks, surety partners and CPA advisors in the loop before deploying capital, not after.

Action Plan for Ohio Valley Merit Shop Contractors

The One Big Beautiful Bill Act created significant changes and real opportunities. Capturing them requires action before year-end 2026:

• Schedule a CPA projection meeting to model Section 179 versus bonus depreciation scenarios for planned 2026 equipment purchases. Include side-by-side comparisons at multiple spending levels, stress-test income assumptions against your WIP schedule, and flag any domestic research activities that should be modeled separately from these depreciation elections.
• Inventory planned equipment acquisitions against Section 179 limits and bonus depreciation opportunities. Identify which qualifying assets belong under Section 179 (vehicles, computer software, tools) and which are better served by bonus depreciation (large machinery, modular systems, automation). For long-lead orders placed before January 19, 2025, verify that the 10% safe harbor under IRS Notice 2026-11 is met.
• Check clean energy project timelines against mid-2026 credit phase-out deadlines. If your firm is pursuing work involving energy-efficient systems, solar or rental property improvements tied to clean energy incentives, confirm that construction-start requirements are satisfied.
• Revisit estate and succession planning documents before year-end to capture the $15 million per-person lifetime exemption effective January 1, 2026. Coordinate with valuation advisors to ensure that the effect of accelerated depreciation on the entity’s book value is accurately reflected in any ownership transfer or buy-sell agreement.
• Review workforce development strategies to leverage expanded training incentives, including broader Pell Grant eligibility, 529 plan usage for trade education, and the temporary overtime deduction. Address your firm’s workforce gap in skilled trades through programs that also deliver tax savings – a win for recruitment and retention.
• Brief your banking and surety partners on how planned capital expenditures and accelerated deductions will affect reported income and balance sheet ratios. Present a clear backlog and WIP narrative that ties every major equipment purchase to contracted work and long-term efficiency gains. Keep unrelated reporting items, such as payment apps reporting, out of lender-facing depreciation analyses.

The merit shop model is built on free enterprise, proactive planning, and winning work on merit. The OBBBA gives you the tools. The action list above puts them to work.