What’s the Difference Between a Bonus Depreciation vs. Section 179?

by | Oct 11, 2022 | Financial Advice, Insights To Business

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There are a lot of tax breaks out there for small businesses, but if you are thinking about buying new equipment for your business, talk to an accountant about how you might use bonus depreciation vs. section 179. This will make your purchases more advantageous from a tax standpoint. For example, if you purchase new equipment costing $1 million or more and put it into service during the year, you can deduct 100 percent of that cost as an expense on your return.

Bonus depreciation is a Temporary Tax Provision

Bonus depreciation is a temporary tax provision initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001. It allows businesses to accelerate their cost recovery for capital expenditures by claiming an additional first-year depreciation deduction on qualified property. The maximum annual deduction under bonus depreciation increased from 50% (in 2016) to 100% (in 2017). To claim this incentive, you must purchase or lease qualifying new or used equipment for use in your trade or business before January 1st, 2022. If you are buying equipment and place it in service before January 1st, 2022, you can claim additional first-year deductions equal to 50% of the cost when you file your 2018 return with TurboTax Self-Employed. However, if your company files its tax return later than January 1st, 2020, then all deductions must be claimed on UDFI2020 instead. No part of your deduction would be forfeited if there was an extension filed with the IRS granting more time until 2021.)

Bonus depreciation is Calculated on a New Property

Bonus depreciation is a tax provision that allows businesses to deduct the cost of a specific new property. Bonus depreciation was initially enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and has been extended several times since then. The current version of bonus depreciation, which expires after 2019, can be found in section 168(k) of the Internal Revenue Code. Bonus depreciation allows businesses to claim an additional first-year depreciation deduction for qualified property placed in service during or after 2015 and before January 1st, 2023. This deduction is calculated on a new property, including but not limited to vehicles, machinery, equipment, furniture, fixtures, and computer software.

The Bonus Depreciation Amount has been Extended

The section 179 deduction is an incentive for businesses to purchase new equipment. It allows a company to deduct the cost of the property immediately instead of depreciating it over the years. The maximum amount that can be deducted depends on your business’s taxable income and the type of property you’re purchasing. You can also elect to take bonus depreciation instead of regular depreciation for certain types of assets purchased and placed in service during 2018 or 2019 (or at any time prior). Bonus depreciation amounts are set based on when you buy your investment and whether it qualifies as a “new” or “used” property: If you buy a new asset in 2018, 2019, or 2020, then bonus depreciation will be 100 percent if placed into service by 12/31/19; 50 percent if placed into service after 12/31/19 but before 1/1/20; zero percent if placed into service after 1/1//20

The Bonus Depreciation Deduction is Available to Both Small Businesses and Large Corporations

Bonus depreciation is available to both small businesses and large corporations. It can be used to purchase new equipment, machinery, or software. Unlike section 179, the bonus depreciation deduction is not limited by a dollar amount; however, it is only applicable for five years after the purchase of your asset (and this period may be extended in certain circumstances). The bonus depreciation deduction differs from section 179 in that it does not require you to buy the asset through a dealer or manufacturer—you can even purchase directly from its manufacturer! The most important thing to remember about these two deductions? They’re both very beneficial and worth taking advantage of if you qualify for them.

Small Businesses May Take Advantage of Section 179 Up to $1 million.

Small businesses may take advantage of Section 179 to write off all or some of their capital investments up to $1 million. Unlike bonus depreciation, which allows companies to write off a percentage of their new purchases, Section 179 provides a flat dollar amount deduction that can be taken in the same year as when the investment was made. This means you’ll pay taxes on more money at once (e.g., your entire cost). Still, it also means that you won’t have to worry about tracking depreciation for each piece of equipment or machinery you purchased throughout the year—you get one significant deduction at year-end instead!