CORPORATE TAX | 04/19/2024
Maximizing Tax Savings: Understanding the Interplay Between Section 179 and Bonus Depreciation
Tax planning has evolved from a year-end exercise into an ongoing, strategic process. With regular consultation becoming essential, one significant opportunity for businesses lies in leveraging Section 179 and bonus depreciation. These provisions, particularly following changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, offer powerful incentives for businesses to accelerate deductions on eligible assets.
However, the phase-out of bonus depreciation, starting with 80% in 2023 and decreasing 20% annually until fully phased out by 2027, makes understanding the interaction between these provisions more critical than ever.
What is Section 179?
Section 179 allows businesses to deduct the cost of qualifying property in the year it is placed in service. This includes tangible personal property such as machinery, equipment, and software used in a trade or business. Qualified real property improvements—like roofs, HVAC systems, fire alarms, and security systems—are also eligible.
Designed to encourage investment, Section 179 enables businesses to expense costs upfront rather than spreading them over time through depreciation deductions. However, it comes with limitations:
- Deduction Limits:
- For 2023: $1.16 million, with a $2.89 million spending cap.
- For 2024: $1.22 million, with a $3.05 million spending cap.
- If purchases exceed the spending cap, the deduction is reduced dollar-for-dollar.
- Eligibility: Property must be used in the taxpayer’s trade or business, not for income production alone (e.g., investment or rental property).
What is Bonus Depreciation?
Bonus depreciation allows businesses to take an additional first-year depreciation deduction on qualifying assets. Under the TCJA, the bonus depreciation rate was increased to 100% for property acquired and placed in service after September 27, 2017, and before January 1, 2023. This rate is now in a phase-out period, reducing to 80% in 2023, with complete elimination by 2027.
Notable features of bonus depreciation include:
- Expanded Eligibility: Unlike prior rules, bonus depreciation now applies to used property, provided it is the first use by the purchaser.
- No Deduction Limit or Spending Cap: Bonus depreciation is not subject to the same thresholds as Section 179, making it particularly advantageous for businesses making significant investments.
The Interplay Between Section 179 and Bonus Depreciation
Combining Section 179 and bonus depreciation strategically can maximize tax savings, especially during the bonus depreciation phase-out period. The IRS requires businesses to apply Section 179 deductions first, followed by bonus depreciation. This ordering can help optimize deductions by utilizing Section 179’s limitations before relying on bonus depreciation’s broader application.
Key considerations include:
- Maximizing Deductions: Leveraging both deductions ensures businesses fully capitalize on immediate and accelerated tax benefits.
- Tailoring to Business Needs: Balancing these deductions allows businesses to align tax strategies with cash flow and investment goals.
- Planning for the Phase-Out: With bonus depreciation phasing out, understanding its interplay with Section 179 becomes increasingly important for proactive tax planning.
How Our Firm Can Help
Navigating the complexities of Section 179 and bonus depreciation requires careful analysis and planning. Our tax consulting team is here to help you:
- Evaluate your asset acquisitions for eligibility.
- Develop a tailored tax strategy that optimizes the interplay between Section 179 and bonus depreciation.
- Plan ahead to maximize deductions as bonus depreciation phases out.
Contact us today to ensure your business leverages every opportunity for tax savings and investment growth. Let us guide you through the ever-changing landscape of tax planning.