Section 179 and Bonus Depreciation for New Haven Small Businesses: Equipment Tax Tips Before Year-End

NEW HAVEN, Conn., Jose’s Tax Service, September 19, 2026

For New Haven small-business owners, equipment purchases made before year-end may create significant federal depreciation deductions. The two primary tools are the Section 179 deduction and bonus depreciation.

These rules apply to qualifying equipment, certain vehicles, office assets, machinery, and eligible software. They do not apply automatically to every purchase. The asset must qualify, be properly documented, and be placed in service during the applicable tax year.

This article provides general information. It is not personalized tax advice. The correct treatment depends on your business structure, taxable income, business-use percentage, purchase terms, and Connecticut filing requirements.

Section 179: Expense qualifying equipment immediately!

Section 179 allows a business to elect to deduct all or part of the cost of qualifying property in the year the property is placed in service. The deduction is claimed through Form 4562, Depreciation and Amortization, primarily Part I.

For tax years beginning in 2026, the federal limits are:

• Maximum Section 179 deduction: $2,560,000.
• Phase-out threshold: $4,090,000 of qualifying property placed in service.
• Complete phase-out: The deduction is generally eliminated when qualifying purchases reach $6,650,000.
• Heavy sport utility vehicle limit: $32,000 for qualifying SUVs weighing more than 6,000 pounds and not more than 14,000 pounds gross vehicle weight.

The phase-out is applied dollar-for-dollar. For example, if a business places $4,200,000 of qualifying property in service, the $2,560,000 limit is reduced by $110,000.

The limits apply to the taxpayer, not separately to each business. Partnerships and S corporations also must consider the limits at both the entity and owner levels.

Identify property that qualifies!

Section 179 generally applies to property that is:

1. Tangible personal property, such as machinery, furniture, office equipment, commercial printers, tools, and production equipment.
2. Certain business-use vehicles, subject to vehicle-specific limitations.
3. Off-the-shelf computer software that is readily available to the general public, licensed nonexclusively, and not substantially modified.
4. Qualified improvement property (QIP) and certain improvements to nonresidential real property, including qualifying roofs, heating and ventilation systems, fire protection systems, alarm systems, and security systems.

The property generally must be:

• Acquired by purchase.
• Used in the active conduct of a trade or business.
• Used more than 50% for business if it is listed property.
• Ready and available for its intended business use during the tax year.

Used equipment may qualify. However, related-party purchases, gifts, inherited property, and transactions with carryover basis require additional analysis.

Apply the taxable-income limitation!

Section 179 is limited to taxable income from the active conduct of a trade or business. It generally cannot create or increase a net operating loss.

If your allowable Section 179 deduction exceeds the applicable business-income limit, the unused amount may be carried forward. A carryover does not eliminate the deduction. It delays the deduction until sufficient qualifying business income exists.

This limitation is distinct from the overall dollar cap and the investment phase-out. Complete all three analyses before finalizing the election.

Bonus depreciation: Use the 2026 federal rules carefully!

Bonus depreciation is formally called the special depreciation allowance. It is reported on Form 4562, Part II, subject to the applicable federal instructions.

For qualifying property acquired and placed in service after January 19, 2025, the federal bonus depreciation rate is generally 100% for 2026. Under current federal law, this restored 100% rate does not follow the prior scheduled phase-down for qualifying property. Older materials that show a 2026 bonus rate of 20% or another reduced percentage may reflect superseded law.

The principal federal qualifications include:

• Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less.
• Certain computer software depreciated under Internal Revenue Code Section 167(f)(1).
• Water utility property.
• Certain qualified film, television, live theatrical, and sound recording productions.
• Certain used property, subject to purchase, related-party, and prior-use restrictions.

Used property can qualify for bonus depreciation. It generally must not have been previously used by the taxpayer or a related party, and additional anti-duplication rules may apply. Review acquisitions from related entities, owners, family members, or controlled businesses before claiming the allowance.

Bonus depreciation is not unlimited in every practical application. Passenger vehicles remain subject to federal depreciation caps. Listed property used 50% or less for qualified business purposes is not eligible for bonus depreciation and may require the Alternative Depreciation System (ADS).

Consult the current IRS Publication 946, How To Depreciate Property and the Instructions for Form 4562 before filing.

Understand the order: Section 179 first, bonus depreciation second!

The federal calculation generally follows this order:

1. Determine the business-use portion of the property’s cost.
2. Apply the Section 179 election to qualifying property.
3. Apply bonus depreciation to the remaining depreciable basis.
4. Calculate any remaining regular MACRS depreciation.

For example, a business purchases and places a $100,000 machine in service during 2026. The business elects a $60,000 Section 179 deduction. The remaining $40,000 basis may qualify for 100% bonus depreciation if all requirements are satisfied.

The business may therefore receive a full federal first-year deduction, subject to taxable-income rules, basis adjustments, and any property-specific limitations.

Do not interpret this as a reason to purchase unnecessary equipment. A deduction reduces taxable income. It does not reimburse the business for the purchase price. Evaluate cash flow, financing costs, operational need, and future tax years before committing capital.

Vehicles require separate analysis!

Vehicle deductions are frequently overstated. Classify the vehicle before calculating the deduction.

Review the following:

• Gross vehicle weight rating (GVWR).
• Passenger seating configuration.
• Cargo-area design.
• Whether the vehicle is a qualified nonpersonal-use vehicle.
• Business-use percentage.
• Personal and commuting use.
• Federal passenger-automobile limits.
• Section 179 heavy-SUV limitation.

A qualifying heavy SUV may be subject to the $32,000 Section 179 limit for 2026. A cargo-only van, delivery truck, or vehicle exceeding applicable weight thresholds may receive different treatment. Passenger automobiles generally remain subject to annual depreciation limits even when bonus depreciation is available.

Maintain a contemporaneous mileage and use record. If business use later falls to 50% or less, depreciation or Section 179 benefits may be recaptured as income. Vehicle recapture is generally reported using Form 4797, Sales of Business Property.

Connecticut does not simply follow the federal deduction!

Connecticut’s treatment is a critical planning issue for New Haven businesses.

Connecticut generally decouples from federal bonus depreciation. The state does not automatically allow the full federal Section 168(k) deduction in the year claimed. Connecticut returns commonly require an add-back of federal bonus depreciation, followed by state depreciation or subtraction adjustments over subsequent years.

Connecticut also does not provide a simple federal match for Section 179. Current Connecticut guidance generally requires an add-back of 80% of the federal Section 179 deduction, followed by subtraction modifications over the next four taxable years.

For many individual and pass-through filers, the general pattern is:

• Add back 100% of federal bonus depreciation for Connecticut purposes.
• Add back 80% of the federal Section 179 deduction.
• Subtract 25% of the applicable prior add-back over each of the next four years.

Corporate taxpayers may calculate Connecticut depreciation using a separate state basis. Pass-through entities may have additional reporting and allocation requirements.

Review the current Connecticut Special Notice SN 2018(9) and relevant Connecticut Department of Revenue Services guidance on bonus depreciation. Exact form lines and instructions may change. A Connecticut tax professional should review the federal election and the state adjustment together.

December 31 is not the entire deadline test!

“Buy equipment by December 31” is incomplete advice.

For a calendar-year taxpayer, the asset generally must be placed in service by December 31, 2026. Placed in service means the property is ready and available for its specific business use.

Complete these steps:

1. Order the asset early. A purchase order or deposit may not be enough.
2. Confirm delivery. Document the date the business takes possession.
3. Complete installation. A machine sitting in a warehouse may not be ready for use.
4. Document operational readiness. Retain acceptance records, installation invoices, and testing documents.
5. Record the business-use percentage. Allocate mixed-use property accurately.
6. Confirm the tax year. Fiscal-year businesses generally use the last day of their tax year, not automatically December 31.
7. Review financing terms. Financing may still constitute a purchase, but title, risk of loss, and contractual terms matter.
8. Prepare Form 4562. List the asset, cost, date placed in service, Section 179 election, bonus depreciation, and remaining basis.

An asset purchased on December 31 but not installed or ready until January 2027 generally belongs in the 2027 depreciation analysis. A last-minute shipment delay can therefore postpone the deduction.

Maintain a complete capital-asset file!

Retain records for each asset. Include:

• Purchase agreement and final invoice.
• Vendor name and taxpayer identification information when applicable.
• Serial number, make, model, and description.
• Date acquired and date placed in service.
• Delivery, installation, and testing records.
• Financing agreement and payment documentation.
• Business-use percentage.
• Vehicle mileage and personal-use records.
• Section 179 election amount.
• Bonus depreciation calculation.
• Connecticut add-back and subtraction schedules.
• Records of later sale, exchange, disposition, or change in use.

The IRS states that records must support the cost, date, business purpose, and business-use percentage. Incomplete documentation can delay processing, weaken an audit defense, or lead to disallowed deductions and penalties.

For additional planning resources, review the IRS depreciation guidance and the Jose’s Tax Service Small Business Learning Center.

Complete your year-end equipment review now!

Before purchasing or placing an asset in service, prepare a written schedule showing:

• Asset description.
• Purchase price and related capitalized costs.
• Expected placed-in-service date.
• Federal Section 179 treatment.
• Federal bonus depreciation treatment.
• Passenger-vehicle or listed-property limits.
• Connecticut add-back and recovery treatment.
• Cash-flow impact.
• Expected business-use percentage.

Jose’s Tax Service provides personalized tax preparation and year-round planning for New Haven small businesses, self-employed taxpayers, and virtual clients. Schedule a consultation through Schedule Your Tax Appointment with Ease or review our tax preparation services in New Haven.

Rules depend on the taxpayer’s facts. Obtain professional review before making a significant equipment purchase or filing a Section 179 or bonus depreciation election.

Category: Tax Planning | Tags: small business tax, New Haven business, deductions, tax strategy