Section 179 vs. Bonus Depreciation

Definition

Section 179 and bonus depreciation are tax incentives that allow businesses to deduct the cost of qualifying assets from their taxable income. Section 179 allows for immediate expensing of a specified amount of the asset's cost in the year it is placed in service, while bonus depreciation permits a larger first-year deduction, typically calculated as a percentage of the asset's cost, with any remaining cost depreciated over the asset's useful life. Understanding the differences between these two provisions is crucial for maximizing tax savings on business investments.

5 Must Know Facts For Your Next Test

1. For tax year 2023, businesses can expense up to $1,160,000 under Section 179, with a phase-out threshold starting at $2,890,000.
2. Bonus depreciation allows businesses to deduct 100% of the cost of qualified property in the first year it is placed in service until it starts to phase down after 2022.
3. Section 179 can only be claimed by businesses with taxable income equal to or greater than the deduction amount; if income is less, the excess can be carried forward.
4. Bonus depreciation does not have an income limitation and can be used even if a business has a net loss.
5. Both Section 179 and bonus depreciation apply only to new and used property but not to land or improvements on land.

Review Questions

• Compare and contrast Section 179 expensing with bonus depreciation in terms of eligibility and limitations.
  • Section 179 allows for immediate expensing of qualified property up to a set limit, with a phase-out for higher investment levels. In contrast, bonus depreciation provides a larger percentage deduction without an income limitation, allowing businesses to deduct more even if they operate at a loss. While both provisions aim to encourage investment, their differing rules on eligibility and the ability to carry forward unused deductions can significantly affect tax strategy.
• Evaluate how businesses might decide between utilizing Section 179 or bonus depreciation when making significant capital investments.
  • When deciding between Section 179 and bonus depreciation, businesses should consider their current taxable income and future income projections. If they anticipate high profits in the current year, Section 179 may be preferable for maximizing deductions. However, if they expect lower profits or have substantial capital expenditures exceeding the Section 179 limit, bonus depreciation could allow for larger immediate deductions without being constrained by income limits.
• Assess the impact of legislative changes on the application of Section 179 and bonus depreciation over recent years and how businesses adapt their strategies accordingly.
  • Legislative changes have significantly influenced both Section 179 and bonus depreciation, especially with recent increases in deduction limits and shifts in eligibility criteria. Businesses adapt their strategies by closely monitoring these changes to optimize their tax positions. For instance, with the introduction of full bonus depreciation, firms may prioritize investments in equipment that qualify under this provision while also weighing the benefits of immediate expensing through Section 179 based on their financial situations. Understanding these dynamics allows companies to align their investment decisions with favorable tax outcomes.

Related terms

Qualified Property: Assets that meet specific criteria and can be expensed under Section 179 or eligible for bonus depreciation, including machinery, equipment, and certain types of vehicles.

Depreciation: The systematic allocation of the cost of a tangible asset over its useful life for accounting and tax purposes.

Taxable Income: The amount of income that is subject to taxation, calculated by subtracting allowable deductions from total income.