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Difference Between Bonus Depreciation and Section 179

If you are a business owner you must have heard of bonus depreciation and section 179. When you buy an asset, it’s required to spread the tax deductions over the asset’s life. Bonus depreciation and Section 179 are two ways to get your deductions upfront without having to wait the entire asset’s life. But what’s the difference between the two? Join me as we explore the differences.

What is a Bonus Depreciation?

Bonus Depreciation refers to a tax incentive. It allows a business to immediately deduct a big percentage of the buying price of eligible assets rather than depreciate them over the life of that asset. It’s also known as the additional first year.

It was created to encourage investment by small businesses and to stimulate the economy.

Businesses use the IRS (Internal Revenue Service) Form 4562 to record bonus depreciation and other types of depreciation and amortization. This form helps in claiming deductions for tax filing purposes. 

Bonus depreciation must be taken in the first year that the item is put to service.

The Tax Cuts and Jobs Act of 2017 made some changes to the rules on bonus depreciation. Most importantly, it doubled the bonus depreciation from 50% as stipulated by the IRS to 100%. It will however not be constant all through. The 100%   bonus depreciation goes up to 1st January 2023 after which it will vary as follows: 2023-80%, 2024-60%, 2025-40%, and 20% in 2026 if the law does not change before then.

Calculation of Bonus Depreciation

Bonus depreciation= Bonus Depreciation Rate (currently 100%) × the cost basis of the acquired asset.

What is Section 179?

Section 179 is a section of the US IRC (Internal Revenue Code). It is an immediate deduction that business owners take for purchases of business equipment instead of depreciating the asset over some time. Section 179 deducts a set dollar of all new business assets. It is applicable if the piece of equipment is purchased and financed and the full amount of the purchase price is eligible for the deduction. 

The depreciable assets include equipment, vehicles, and software.

Section 179 allows businesses to lower their current year tax expense rather than depreciating the asset over time in future tax years.

It’s however limited to a maximum deduction of$ 1,050,000 and a value of the property purchased to $2,620,000 for the year 2021.

The section 179 expensing method is given as an incentive for small businesses to grow their businesses with the purchase of new equipment. 

To qualify for section 179 expenses the asset must be used more than 50% in your business.

It also uses Form 4562 to claim deductions.

Similarities between Bonus Depreciation and Section 179

  • They are both methods of asset depreciation
  • Both use Form 4562 to claim deductions
  • Both are applicable in the first year of a new asset

Differences between Bonus Depreciation and Section 179

Type of deduction

Bonus Depreciation deducts a percentage of the cost while Section 179 deducts a set dollar of new business assets.

Annual Limit of deduction

Bonus depreciation has no annual limit of deduction as long as the items are in the same category while Section 179 has an annual limit of $1,050,000.

The maximum amount of purchases

Bonus Depreciation has no maximum amount of equipment purchases while in Section 179 the maximum amount of equipment purchased to qualify for full deduction is $2,620,000.

Statutory end date

The statutory end date for the 100% deductions for Bonus Depreciation (according to the Tax Cuts and Jobs Act of 2017) is 31st December 2022 after which it will vary to 2023-80%, 2024-60%, 2025-40%, and 20% in 2026 if the law does not change. Section 179, on the other hand, has no statutory end date.

Profitability

Bonus Depreciation can be used even if your business is not profitable while Section 179 deduction requires profitability.

Comparison to the business income

Bonus depreciation can be larger than your business income but for section 179 it must be less than your business income.

Improvement to real estate coverage

Section 179 covers real estate upgrades such as adding a new roof to your building while Bonus depreciation does not cover this category

 Bonus Depreciation vs. Section 179: Comparison Table

Summary of Bonus Depreciation vs. Section 179

Bonus Depreciation and Section 179 are both good ways of depreciating your assets. Depending on your plan and the assets you are putting up, you will not go wrong with either or both as it’s possible to combine them. This will be of course in consultation with your accountant. And with this information, you are better placed to make a wise choice. 

FAQS

Is it better to take bonus depreciation or Section 179?

It is better to take Section 179. 

Can I take Section 179 and bonus depreciation?

Yes. You can take Section 179 and bonus depreciation. 

Is bonus depreciation calculated before 179?

No, Section 179 comes first.

Can you take Section 179 and bonus depreciation on vehicles?

Yes.


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References :


[0]United States. Internal Revenue Service. Basis of Assets: For Use in Preparing ... Returns. Department of the Treasury, Internal Revenue Service, 2018. https://books.google.co.ke/books?id=P31DLWD-tgAC&printsec=frontcover&dq=Difference+between+Bonus+Depreciation+and+Section+179&hl=en&sa=X&ved=2ahUKEwj0vd-S68f0AhWi8bsIHTm8CcMQ6AF6BAgDEAI#v=onepage&q=Difference%20between%20Bonus%20Depreciation%20and%20Section%20179&f=false

[1]CCH Tax Law Editors. U.S. Master Depreciation Guide 2008. CCH, 2007. https://books.google.co.ke/books?id=--pLHsdfhEoC&pg=PA217&dq=Difference+between+Bonus+Depreciation+and+Section+179&hl=en&sa=X&ved=2ahUKEwj0vd-S68f0AhWi8bsIHTm8CcMQ6AF6BAgJEAI#v=onepage&q=Difference%20between%20Bonus%20Depreciation%20and%20Section%20179&f=false

[2]United States. United States Code. Office of the Law Revision Counsel of the House of Representatives, 2013. https://books.google.co.ke/books?id=O_yAe_7cKIsC&printsec=frontcover&dq=Difference+between+Bonus+Depreciation+and+Section+179&hl=en&sa=X&ved=2ahUKEwj0vd-S68f0AhWi8bsIHTm8CcMQ6AF6BAgLEAI#v=onepage&q=Difference%20between%20Bonus%20Depreciation%20and%20Section%20179&f=false

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