Bonus Depreciation
As the Tax Cuts and Jobs Act (Trump’s Tax Reform Bill) is starting to be phased out, our clients should be aware of the affect this may have on their tax returns. In 2017 when the bill was passed one of the changes was to bonus depreciation allowing you to accelerate 100% of the asset’s value instead of 50%. This changed prompted accountants to use bonus depreciation almost exclusively since 2017 as it accelerated the benefit to the taxpayer and had less limitations than its counterpart, section 179. Unfortunately, the bill had a phase out provision built in reducing the allowable accelerate under this method by 20% each year after 2022 until its sunsets in 2025. As bonus depreciation continues to get phased out it may become more beneficial to use Section 179 over bonus depreciation so its important to understand the main differences between the two methods.
Therefore, let’s talk about what the main differences between bonus depreciation and section 179 are which can be used on most entities excluding trusts, estates, and certain non-corporate issuers. Let’s start with the requirements needed to take each type of accelerated depreciation. Bonus depreciation allows for any tangible property with a life of 20 years or less to be accelerated by that year’s allowable rate. Unlike bonus depreciation, section 179 allows you to designate up to 100% of the assets value to be depreciated but instead is subject to yearly limits placed on the taxpayer themselves. As of 2024 the current limit is you can accelerate a maximum of $1,220,000 which gets reduced after you exceed $3,050,000 in asset additions during the year. In addition to these limitations there are also limitations on the type of additions you can take section 179 on. Section 179 cannot be used on Real Property which is any land, building or permanent fixture attached to the property. There are exceptions such as roofs, HVAC, fire protection systems, security system and qualified improvement property all being allowed. Qualified improvement property is considered any internal improvement made to the building after it is placed into service excluding enlargement, elevator/escalators, and structural framework. In addition. assets leased by you, inherited, and gifted are not eligible for section 179 and vehicles can also be limited.
Aside from the requirements there is also a difference in the way you can take the accelerated depreciation. Bonus depreciation allows you to take the full amount without restriction allowing you to go into a loss using the extra depreciation. Section 179 however does not allow you enter a loss and will disallow the portion exceeding your net income until subsequent years where you have the income to take the remaining portion. Fortunately, both methods can be used in conjunction with each other to provide the biggest benefit possible but the large losses we have seen for the past few years might be a thing of the past.
If you have additional questions, please reach out to our staff!