Section 179 vs Bonus Depreciation

Special Depreciation Allowance Options: Section 179 vs Bonus Depreciation

Did you purchase new machinery or equipment? Are you trying to lower your taxable income? If so, it’s important that you maximize your tax savings with special depreciation allowance options.

The Internal Revenue Code generally requires capitalized assets to be depreciated over their useful lives, which can range from 3 years for software to 39 years for certain real estate. However, special depreciation options give business owners the ability to write off the full amount of certain assets in the year placed in service.

There are two types of special depreciation allowance options: Section 179 and Bonus depreciation. In this article, we’ll cover the fundamentals of these two tax planning strategies, including what type of property qualifies and the tax implications.

If you have any questions on the specifics of your situation, contact Kislay Shah CPA PC to schedule your free consultation.

What is Section 179 Depreciation?

Section 179 allows taxpayers to immediately expense the cost of property in the year it’s placed in service. Under Publication 946, eligible property for Section 179 includes tangible business-use personal property, off-the-shelf computer software, and certain leasehold improvements. Examples include machinery, equipment, and office furniture.

For the 2024 tax year, the Section 179 limit is $1,220,000, which begins to phase-out dollar-for-dollar once more than $3,050,000 in assets are purchased during the year. Most business owners have no problem staying under the threshold.

What is Bonus Depreciation?

Bonus depreciation gives taxpayers the ability to expense up to 60% of the cost of assets placed in service during the year for the 2024 tax year. This special depreciation option has begun to phase out, meaning taxpayers are only able to deduct 40% in 2025 and 20% in 2026. Bonus depreciation is completely phased out beginning in 2027 if new legislation isn’t passed.

There is no limit to the amount of Bonus depreciation taxpayers can claim. However, businesses must still abide by the maximum percentages. Let’s say you purchase $100,000 in equipment. For the 2024 tax year, you could immediately expense $60,000 under Bonus depreciation.

Special Depreciation Allowance Tax Considerations

When using special depreciation options to immediately write off qualifying assets, it’s important to be aware of the tax implications. For one, taking special depreciation reduces your asset basis to zero. This can increase your capital gain taxes when it comes time to sell the asset.

For example, let’s say that you took Section 179 on a $5,000 piece of equipment. Three years later, you sold the equipment for $1,000. Since you wrote off the entire cost of the equipment in the first year, your capital gain will be $1,000 (sale price – basis).

Another tax consideration to be aware of is operating losses. Section 179 cannot create a loss. If you only have $1,500 in taxable income for the year, your Section 179 deduction is limited to $1,500. This isn’t the case with Bonus depreciation, as this special depreciation option can add to your loss.

It’s also important to understand that not all states follow Federal tax treatment for Section 179 and Bonus depreciation, with some states disallowing these deductions altogether.

Section 179 and Bonus Depreciation for Vehicles

Section 179 deductions can be taken on certain types of vehicles, including passenger, heavy SUVs, trucks, and vans purchased and put to use in the same year. Section 179 applies to new or used vehicles as long as they are used in business for more than 50% of the time.

Light vehicles under 6,000 pounds are allowed a Section 179 deduction of $12,200 for 2023 and an additional $8,000 Bonus depreciation, totaling $20,200.

Heavy vehicles that are 6,000 pounds and heavier are allowed to take a Section 179 deduction of $28,900 for 2023 and $30,500 for 2024. Bonus depreciation is capped at 80% for 2023 and 60% for 2024 of the net depreciable balances after Section 179 deductions.

Maximizing Tax Savings

Special depreciation options are a great tax planning strategy when looking to minimize your tax burden. Remember, the asset needs to be placed in service by the end of the year to be qualifying. Paying for a machine, but not installing it until the next year does not qualify for special depreciation options.

For more information on how special depreciation options factor into your tax plan, reach out to one of our team members at Kislay Shah CPA PC today.