Comparing Section 179 and Bonus Depreciation for Asset Deductions

The IRS provides tax incentives for business investments in fixed assets through Section 179 and Bonus Depreciation deductions. 

These two deductions are often applied for manufacturing and real estate companies, but they can be creatively applied to many other businesses as well.  

Understanding the differences between these deductions helps optimize tax benefits. Let’s take a look.

Eligible Assets

• Section 179: Applies to personal property like equipment, machinery, and certain real property (e.g., HVAC systems, roofs). Assets must be used primarily for business.
• Bonus Depreciation: Extends to farm buildings and land improvements. It applies to assets with a useful life of 1-20 years, including certain real estate improvements.

Bonus depreciation requires applying the deduction across all assets within a particular asset class, whereas Section 179 allows for more selective application on an asset-by-asset basis.

Annual Deduction Limits

• Section 179: The deduction limit for 2023 is $1,160,000, with an investment limit of $2,890,000. There must be enough business income to utilize this deduction.
• Bonus Depreciation: For the 2023 tax year, the deduction is 80% of an asset's cost, down from 100% in 2022. Unlike Section 179, there’s no business income limit, so it's usable even when reporting a business loss.

Deduction Timeline

Both deductions must be taken in the tax year when the asset is placed into service. However, Section 179 allows flexibility to defer part of the expense, while bonus depreciation requires a set percentage to be applied.

Special Considerations for Listed Property

Listed property (used over 50% for business purposes) has specific deduction limits. For vehicles under 6,000 pounds, the maximum Section 179 deduction is $12,200, and bonus depreciation adds up to $8,000, totaling $20,200.

Deciding Between Section 179 and Bonus Depreciation

• Income and Expense Evaluation: Use Section 179 if you have enough business income; otherwise, bonus depreciation is more suitable.
• Consider Fixed Asset Purchases: If total fixed asset additions exceed Section 179 limits, bonus depreciation may be the better choice.
• Tax Bracket Planning: Analyze current and future tax brackets to decide between accelerated or straight-line depreciation.

Combining Both Deductions

You can use both Section 179 and bonus depreciation, especially when near the Section 179 deduction limits. However, state regulations may differ from federal rules, so be mindful of potential complications when filing state tax returns.

By strategically using Section 179 and bonus depreciation, business owners can effectively manage their tax liabilities while maximizing deductions on qualifying assets.

Case Study: Section 179 Vs. Bonus Depreciation

Your State Matters

Every state is different in how they treat bonus depreciation and Section 179 deductions.With the 2023 example (above), if the investor used the bonus depreciation in Kansas (for example), they would be able to utilize the $320,000 deduction. However, if his equipment was located in California, would only be able to apply a $80,000 deduction ($400,000 spread out over five years). This is because California does not conform with the federal treatment of bonus depreciation and does not allow accelerated bonus depreciation.