Both bonus depreciation and Section 179 allow taxpayers to take accelerated deductions on the upfront purchase price for the businesses’ fixed asset additions. There are notable differences between the two. Some fixed asset additions may only be eligible for one or the other, or there may be instances where a combination of both can be used on a specific item. Bonus depreciation will allow you to create or increase a loss, but Section 179 has its limitations to not allow a loss to be created. There is no limit to the amount of bonus depreciation that a taxpayer can take, but there is a limit for Section 179 that a taxpayer can take.
Bonus Depreciation
Taxpayers benefit from bonus depreciation for qualifying assets because they can deduct a large portion of the cost of their additions in the year they are placed in service.
Assets that were placed in service before January 1, 2023, were able to take 100% bonus depreciation. This meant taxpayers were able to deduct the full amount of the cost of those assets. With the Tax Cuts and Jobs Act of 2017, there was a phase-out period for bonus depreciation for tax years 2023 and beyond. For the 2023 tax year (assets placed in service after 12/31/2022) this benefit will be lowered to 80% of the cost of assets. This will continue to decrease by 20% each year (2024 – 60%, 2025 – 40%, 2026 – 20%) until January 1, 2027, then the bonus depreciation will be completely phased out.
There are times when a taxpayer may not want to take bonus depreciation on their asset additions. If a taxpayer does not want to take bonus depreciation they must elect out for each class of property.
Some examples of property qualifying for bonus depreciation:
- MACRS property that has a recovery period of 20 years or less
- Computer software that is eligible for depreciation
- Used equipment if it was not used by the taxpayer before acquisition.
- Qualified leasehold improvement property:
- Improvements to the interior section of a nonresidential building
- The improvements must be placed in service after the building was originally placed in service
- This does not include additions to a building, elevators/escalators, or the internal structural framework of the building.
Section 179
The 2023 maximum Section 179 deduction allowed is $1,160,000. To get the full deduction, the original cost of the property eligible must not exceed $2,890,000. This allows taxpayers to take a set dollar amount of accelerated depreciation on asset acquisitions if they do not want to take the full amount.
Some examples of property qualifying for Section 179 deduction:
- Tangible personal property (machinery, equipment, furniture & fixtures)
- Off-the-shelf computer software
- Certain storage facilities
- Qualified real property (non-residential):
- Roofs, HVAC property, Security systems, Fire protection, and alarm systems
- Includes Qualified Improvement Property which are from above the improvements to the interior portion of a nonresidential building
In Summary
Keep in mind that not all states conform to the Internal Revenue Code for Bonus depreciation or Section 179. There is no accelerated depreciation (Bonus/179) allowed for related party fixed asset additions. When it comes to tax planning for what type of accelerated deduction works best it is not a one-size-fits-all. Many factors go into what works best for taxpayers each year.
For any questions about this program or other support for manufacturers, contact a member of HBK Manufacturing Solutions by calling 330-758-8613 or emailing [email protected].
