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Bonus Depreciation vs Section 179: Which Is Right for Your Business?

Writer's picture: Rick RubergRick Ruberg

Bonus depreciation and Section 179 are two essential tools in a business owner's tax strategy. Both allow businesses to deduct the cost of certain assets up front rather than depreciating them over several years. However, they have distinct features and limitations. Understanding how they work and how they differ can help businesses optimize their tax savings.


Real Estate Depreciation

Bonus Depreciation: An Overview


Bonus depreciation allows businesses to deduct a percentage of the cost of qualified assets immediately in the year the asset is placed into service. As of 2023, the bonus depreciation rate is 80%, with further reductions planned for subsequent years unless legislation extends the program.



  • Key Features:

    • No annual limit on deductions.

    • Applies to both new and used property.

    • Automatically applies unless the taxpayer elects out of it.

    • Can be used for property with useful lives of 20 years or less, such as machinery, equipment, furniture, and certain property improvements.

  • Ideal Use Case:

    • Bonus depreciation is best for businesses making large investments in multiple assets or assets exceeding Section 179 limits.


Section 179: An Overview


Section 179 allows businesses to deduct the full purchase price of qualifying assets up to an annual limit. In 2023, the maximum deduction is $1,160,000, with a phase-out threshold of $2,890,000 in total asset purchases.


  • Key Features:

    • Deductions are capped annually.

    • Applies to new and newly purchased used property.

    • Must be explicitly elected by the taxpayer.

    • Covers a broader range of assets, including business vehicles, software, and office furniture.


  • Ideal Use Case:

    • Section 179 is better for small to mid-sized businesses looking to manage taxable income and control deduction amounts.


 

Key Differences Between Bonus Depreciation and Section 179


Feature

Bonus Depreciation

Section 179

Deduction Limit

No limit

$1,160,000 (2023)

Applies to Used Assets

Yes

Yes, if newly purchased

Applies Automatically

Yes, unless opted out

No, must be explicitly elected

Annual Income Limit

None

Limited by taxable business income

Phase-Out Threshold

None

$2,890,000 for 2023

How They Work Together


Businesses can often use Section 179 and bonus depreciation in the same tax year.


Here’s how:

  1. Deduct Using Section 179 First: Apply Section 179 to qualified purchases until reaching the annual deduction limit.

  2. Apply Bonus Depreciation: Use bonus depreciation for any remaining balance of qualified property not covered by Section 179.


Example Scenario:


A business purchases $3,000,000 in qualified equipment in 2023:


  • Section 179 allows a $1,160,000 deduction (the maximum limit).

  • The remaining $1,840,000 qualifies for 80% bonus depreciation, resulting in a $1,472,000 deduction.

  • Total first-year deduction: $2,632,000.


This combined approach maximizes the business’s tax savings.



 

Pros and Cons of Each Option


Bonus Depreciation


  • Pros: No annual limit; applies automatically; great for large purchases.

  • Cons: Can’t be selectively applied to certain assets; deduction percentage phasing out after Biden took office.


Section 179


  • Pros: Offers control over which assets are deducted; broader asset eligibility.

  • Cons: Annual limits can restrict deductions for larger investments.


Considerations for Choosing the Right Option


  1. Business Size and Needs:

    • Small businesses with limited taxable income may prefer Section 179 for its flexibility.

    • Larger businesses with significant capital investments may benefit more from bonus depreciation.

  2. Taxable Income:

    • Section 179 deductions cannot exceed taxable income, but bonus depreciation can create a net operating loss (NOL).

  3. Asset Purchases:

    • If your purchases exceed Section 179 limits, bonus depreciation provides additional deductions.

  4. Future Plans:

    • With bonus depreciation phasing out, businesses may prioritize using it now for larger deductions.



 

Conclusion: Finding the Right Fit


Choosing between Section 179 and bonus depreciation—or using both—depends on your business's needs, taxable income, and investment plans. While Section 179 offers more flexibility, bonus depreciation is ideal for large-scale purchases.


By consulting a tax professional, you can create a strategy that maximizes your deductions and helps you reinvest in your business. Stay informed of tax law changes to ensure you’re leveraging these tools to their fullest potential.

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